Refer to Figure 15.1 for the following questions.
Figure 15.1

-Suppose the graph in Figure 15.1 represents the market for the British pound under the Bretton Woods System. If the par exchange rate was set at 4 United States dollars:
A)a shortage of pounds will exist.
B)the British central bank will have to buy pounds with US dollars.
C)the pound will be undervalued versus the US dollar.
D)the demand for pounds will be greater than the supply.

Question

Refer to Figure 15.1 for the following questions.
Figure 15.1
 
-Suppose the graph in Figure 15.1 represents the market for the British pound under the Bretton Woods System. If the par exchange rate was set at 4 United States dollars:
A)a shortage of pounds will exist. 
B)the British central bank will have to buy pounds with US dollars. 
C)the pound will be undervalued versus the US dollar. 
D)the demand for pounds will be greater than the supply.

Quizplus · Accepted Answer

In the given graph, the demand curve for pounds intersects the supply curve at a point where the exchange rate is below the par value of 4 US dollars. This means that the pound is undervalued compared to the US dollar. To maintain the fixed exchange rate, the British central bank will have to buy pounds with US dollars to increase the supply of pounds in the market and bring the exchange rate back to the par value. This action of the central bank will lead to an increase in the quantity of pounds supplied and will eliminate the shortage of pounds. Therefore, option B is the best choice.

Refer to Figure 15.1 for the Following Questions