Suppose that the United States ﬁxes the dollar-pound exchange rate. In the process of maintaining the ﬁxed exchange rate, the U.S. central bank regularly ﬁnds itself in a position of having to increase
Its reserves of pounds. Based on this, we could conclude that

Question

Quizplus · Accepted Answer

If the U.S. central bank is regularly increasing its reserves of pounds, it means that the demand for pounds is consistently higher than the supply in the private foreign exchange market. This implies that the equilibrium exchange rate would be lower than the fixed dollar-pound exchange rate. Therefore, the fixed rate consistently exceeds the equilibrium rate that would be produced by a private foreign exchange market.

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