-In Exhibit FF-6, considering only the U.S. and Great Britain, if the exchange rate of dollars per British pound is fixed at 1.70, there would be a
A) surplus of dollars on the foreign exchange market
B) shortage of dollars on the foreign exchange market
C) shortage of marks on the foreign exchange market
D) trade deficit in Great Britain
E) trade surplus in the United States

Question

-In Exhibit FF-6, considering only the U.S. and Great Britain, if the exchange rate of dollars per British pound is fixed at 1.70, there would be a
A) surplus of dollars on the foreign exchange market 
B) shortage of dollars on the foreign exchange market 
C) shortage of marks on the foreign exchange market 
D) trade deficit in Great Britain 
E) trade surplus in the United States

Quizplus · Accepted Answer

When the exchange rate is fixed at a level that does not reflect the true market equilibrium, it can lead to imbalances. If the fixed rate is higher than what the market would naturally set, it makes the British pound more expensive relative to the dollar. This situation would likely reduce the demand for pounds while increasing the supply of dollars being exchanged for pounds, leading to a surplus of dollars on the foreign exchange market.

-In Exhibit FF-6, Considering Only the U