The Graph Below Shows the Supply and Demand Curves for Dollars

question 150

Multiple Choice

The graph below shows the supply and demand curves for dollars in the pound/dollar market. Refer to the graph above. Assume that D₁ and S₁ are the initial demand for and supply of dollars. Suppose that Britain's demand for dollars increases from D₁ to D₂. If the British government wishes to fix the exchange rate at the initial level, then it would be faced with a problem of:

• A) Deteriorating terms of trade
• B) Rationing LM dollars among British importers who would like to acquire LN dollars
• C) A rise in the pound price of dollars
• D) Rationing LN dollars among British importers who would like to acquire LM dollars

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