Figure 19-4
-Refer to Figure 19-4.The equilibrium exchange rate is 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.After the shift,

Question

Figure 19-4 
-Refer to Figure 19-4.The equilibrium exchange rate is 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.After the shift,

Quizplus · Accepted Answer

After the shift in demand to D2, the new equilibrium exchange rate will be at point B, which is higher than the fixed exchange rate set by the British government at $4/pound. This creates a surplus of pounds equal to the vertical distance between points A and B, which is 600 million pounds. Therefore, the best choice is D.

Figure 19-4 -Refer to Figure 19-4.The Equilibrium Exchange Rate Is at A,$3/pound.Suppose