The figure given below depicts the foreign exchange market for British pounds traded for U.S.dollars. Figure 21.2 Refer to Figure 21.2.Suppose the British central bank is committed to maintaining an exchange rate of £1 = $1.50, but there is a permanent shift in supply from S₁ to S₃.According to the Bretton Woods agreement: A)the pound should be devalued. B)the dollar should be devalued. C)the British central bank should buy pounds in exchange for dollars. D)the British central bank should encourage speculation. E)the Fed should intervene to maintain the exchange rate of £1 = $1.

Question

Quizplus · Accepted Answer

As per the Bretton Woods agreement, if there is a permanent shift in supply, the central bank of the country with the currency that appreciates should devalue its currency. In this case, there is a shift in the supply of pounds, leading to the appreciation of the pound relative to the dollar. Therefore, the British central bank should devalue the pound to maintain the exchange rate of £1 = $1.50.

The Figure Given Below Depicts the Foreign Exchange Market for British