Suppose That the United States Fixes the Dollar-Pound Exchange Rate

question 62

Multiple Choice

Suppose that the United States fixes the dollar-pound exchange rate. In the process of maintaining the fixed exchange rate, the U.S. central bank regularly finds itself in a position of having to increase its reserves of pounds. Based on this, we could conclude that

• A)the fixed dollar-pound exchange rate is consistently below the equilibrium exchange rate that would be produced by a private foreign exchange market.
• B)the fixed dollar-pound exchange rate consistently exceeds the equilibrium exchange rate that would be produced by a private foreign exchange market.
• C)the fixed dollar-pound exchange rate is a good approximation of the exchange rate that would be produced by a private foreign exchange market.
• D)the U.S. central bank is regularly having to reduce the domestic money supply.

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