Under a managed float,if U.S.demand for British goods drops,which of the following actions would the Bank of England need to take in order to stop any movement in the dollar-pound exchange rate?
A) Buy British pounds for dollars in order to shift the demand curve for pounds leftward
B) Sell British pounds for dollars in order to shift the supply curve for pounds leftward
C) Sell British pounds for dollars in order to shift the supply curve for pounds rightward
D) Buy British pounds for dollars in order to shift the demand curve for pounds rightward
E) Do nothing,since purchasing power parity will correct the situation in the short run.

Question

Quizplus · Accepted Answer

Under a managed float, if U.S. demand for British goods drops, the demand for pounds will decrease, causing the value of the pound to fall relative to the dollar. To stop this movement in the exchange rate, the Bank of England would need to increase demand for pounds. This can be achieved by buying pounds for dollars, which would shift the demand curve for pounds rightward. Therefore, the correct answer is D. Option A (Buy British pounds for dollars in order to shift the demand curve for pounds leftward) would only exacerbate the situation, Option B (Sell British pounds for dollars in order to shift the supply curve for pounds leftward) and Option C (Sell British pounds for dollars in order to shift the supply curve for pounds rightward) are irrelevant under a managed float system, and Option E (Do nothing, since purchasing power parity will correct the situation in the short run) assumes that purchasing power parity will adjust the exchange rate, which may not be the case in the short run.

Under a Managed Float,if U