The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:
A) U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B) U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C) U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D) U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
E) U.S. demand for pounds would be equal to the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

Question

Quizplus · Accepted Answer

At an exchange rate of $1.72 per pound, the pound is overvalued ($1.72 > $1.70). This means that the U.S. demand for pounds would be less than the supply of pounds for sale, as the pound is relatively more expensive compared to the equilibrium exchange rate. This would result in a surplus of pounds in the foreign exchange market.

The Equilibrium Exchange Rate of Pounds Is $1