The Graph Below Shows the Supply and Demand Curves for Dollars

question 15

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, one possible way to do this is for the government to:

• A) Buy and add more to its dollar reserves
• B) Sell pounds in exchange for U.S. dollars
• C) Encourage the British to import more U.S. products
• D) Sell some of its dollar reserves

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Definitions:

Heckscher-Ohlin Model

An economic theory that proposes countries export what they can most efficiently and abundantly produce.

Comparative Advantage

The ability of an individual, company, or country to produce a good or service at a lower opportunity cost than its competitors.

Ricardian Model

An economic theory that focuses on comparative advantage, explaining how countries can gain from trade by specializing in producing goods at a lower opportunity cost.

Production Possibility Frontiers

These are curves that depict the maximum potential output of a combination of two goods or services that an economy can produce with available resources.