Figure 30-4
-Refer to Figure 30-4.The equilibrium exchange rate is originally at A,$3/pound.Suppose the British government pegs its currency at $4/pound.Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D2.If the government abandons the peg,the equilibrium exchange rate would be

Question

Figure 30-4 
-Refer to Figure 30-4.The equilibrium exchange rate is originally at A,$3/pound.Suppose the British government pegs its currency at $4/pound.Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D2.If the government abandons the peg,the equilibrium exchange rate would be

Quizplus · Accepted Answer

When the British government pegs its currency at $4/pound, the equilibrium exchange rate shifts from A ($3/pound) to B ($4/pound). However, if the government abandons the peg, the speculators' expectations would be confirmed, and they would buy even more pounds, causing the demand curve for pounds to shift to D2. This shift in demand results in a new equilibrium exchange rate at C, which is below $3/pound, indicating a depreciated pound. Therefore, the correct option is C, $2/pound.

Figure 30-4 -Refer to Figure 30-4.The Equilibrium Exchange Rate Is Originally at Is