QUESTION Si (Spring-summer) SE(Autumn-winter) $1.90 S1.60--2- DE 30 40 50 60 70

Question

QUESTION Si (Spring-summer) SE(Autumn-winter) $1.90 S1.60--2- DE 30 40 50 60 70 (billions) The figure above shows the foreign exchange market. D is the demand curve for pounds. S(Spring-summer) and S(Autumn-winter) are the supply curves of pounds during the spring-summer and autumn-winter seasons respectively Refer to the above figure. Assume that the British government is committed to maintaining a fixed exchange rate at $1.90 per pound. In the autumn-winter period, what type of intervention must British monetary authorities engage in? o a. Buy 20 billion pounds at $1.90 b. Sell 20 billion pounds at $1.90 c. Sell 60 billion pounds at $1.60 od. Buy 10 bllion pounds at $1.60

Explanation / Answer

Option (a).

When exchange rate is $1.90, quantity demanded of pounds is 50 billion and quantity supplied (in Autumn-winter) of pounds is 70 billion. There is a surplus of (70 - 50) billion = 20 billion pounds which will put a downward pressure on pounds. So government has to buy 20 billion pounds at $1.90 each.

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