The diagram below represents the exchange market position of the United States in trade with the United Kingdom.Starting at the equilibrium exchange rate of $3 per pound,suppose the demand for pounds rises from D0 to D1.
Figure 17.1 Foreign Exchange Market

-Refer to Figure 17.1.If the exchange rate was allowed to rise to $4 per pound,U.S.monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

Question

The diagram below represents the exchange market position of the United States in trade with the United Kingdom.Starting at the equilibrium exchange rate of $3 per pound,suppose the demand for pounds rises from D0 to D1.
Figure 17.1 Foreign Exchange Market
 
-Refer to Figure 17.1.If the exchange rate was allowed to rise to $4 per pound,U.S.monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

Quizplus · Accepted Answer

If the demand for pounds rises from D0 to D1, the exchange rate will appreciate and move from $3 per pound to a higher rate. In order to maintain the exchange rate at $4 per pound, U.S. monetary authorities would have to supply more than 6 million pounds to the foreign exchange market in exchange for dollars. Therefore, the statement is false.

The Diagram Below Represents the Exchange Market Position of the United