Suppose that the United States ﬁxes the dollar-pound exchange rate. In the process of maintaining the ﬁxed exchange rate, if the U.S. central bank starts to realize reduced reserves of pounds, this
Suggests that

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If the U.S. central bank starts to realize reduced reserves of pounds, it suggests that the quantity demanded of pounds has exceeded the quantity supplied of pounds. This means that the U.S. central bank has to engage in buying pounds in the foreign exchange market, resulting in a reduction of its reserves of pounds. This situation is called a balance of payment deficit, where a country's demand for imports exceeds its exports, leading to a net outflow of its currency to other countries. As a consequence, the U.S. central bank would likely increase the supply of dollars to buy pounds, which could eventually lead to a depreciation of the dollar or a rise in the exchange rate.

Suppose That the United States ﬁXes the Dollar-Pound Exchange Rate