Refer to the graph above, which shows a change in the demand for pounds from D to D'. Under a system of fixed exchange rates, the:

Question

Quizplus · Accepted Answer

When there is a shift in the demand curve for a currency in a fixed exchange rate system, the exchange rate remains fixed and the international monetary reserves will need to be used to fill the gap between the supply and demand. In this case, there is a shortage equal to the distance between points A and B on the horizontal axis. Therefore, option C is the correct choice. Option A is incorrect because the graph doesn't provide enough information to conclude that the price of a pound will increase to $3. Option B is incorrect because the graph doesn't provide enough information to conclude that the price of a dollar will increase to 3 pounds. Option D is incorrect because payment deficits don't cause changes in price and income levels in a fixed exchange rate system since the exchange rate is fixed.

Refer to the Graph Above, Which Shows a Change in the Demand