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.Under a floating exchange rate system,the exchange rate would rise to $4 and U.S.monetary authorities would have to supply 4 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.Under a floating exchange rate system,the exchange rate would rise to $4 and U.S.monetary authorities would have to supply 4 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 would actually fall from $3 per pound to a new equilibrium at a lower rate. Therefore, the statement in option A is incorrect. Additionally, under a floating exchange rate system, the U.S. monetary authorities would not need to intervene by supplying pounds to the market to maintain a specific exchange rate. Rather, the exchange rate would adjust freely based on market forces of supply and demand.

The Diagram Below Represents the Exchange Market Position of the United