24) Use the following graph, which shows the supply and demand curves for dollar

Question

24) Use the following graph, which shows the supply and demand curves for dollars in the pound/dollar market, to answer the next question, S, 1/4 115 D2 0. 0 Q Quantity of Dollars 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) sell some of its dollar reserves B) sell pounds in exchange for U.S. dollars C) buy and add more to its dollar reserves D) encourage the British to import more U.S. products.

Explanation / Answer

C is the correct answer

Reason

To have a fixed exchange rate, the extra demand for the dollar has to be supplied by the British government. For that to happen, they have to buy and add more to it's dollar reserves.

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