Suppose that the US Economy adopts a fixed exchange rate regime against the British Pound: BP-$1.3 If the market exchange rate is at BP-$1.2 (see picture below) E 1.3 32 1.2 E DE 3 There is an excess supply of British Pounds on the market, and the Fed needs to purchase Pounds in exchange for US dollars, which means to increase its reserves of British Pounds There is an excess demand of British Pounds on the market, and the Fed needs to purchase Pounds in exchange for US dollars, which means to increase its reserves of British Pounds There is an excess supply of British Pounds on the market, and the Fed needs to purchase Dollars in exchange for British Pounds, which means to decrease its reserves of British Pounds There is an excess demand of British Pounds on the market, and the Fed needs to purchase Dollars in exchange for British Pounds, which means to decrease its reserves of British Pounds

Suppose that the US Economy adopts a fixed exchange rate regime against the British Pound: BP-$1.3 If the market exchange rate is at BP-$1.2 (see picture below) E 1.3 32 1.2 E DE 3 There is an excess supply of British Pounds on the market, and the Fed needs to purchase Pounds in exchange for US dollars, which means to increase its reserves of British Pounds There is an excess demand of British Pounds on the market, and the Fed needs to purchase Pounds in exchange for US dollars, which means to increase its reserves of British Pounds There is an excess supply of British Pounds on the market, and the Fed needs to purchase Dollars in exchange for British Pounds, which means to decrease its reserves of British Pounds There is an excess demand of British Pounds on the market, and the Fed needs to purchase Dollars in exchange for British Pounds, which means to decrease its reserves of British Pounds

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter19: International Finance And The Foreign Exchange Market

Section: Chapter Questions

Problem 5CQ

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