Suppose that the United States fixes the dollar-pound exchange rate. In the process of maintaining the fixed exchange rate, if the U. S. central bank starts to realize reduced reserves of pounds, this suggests that_.

Question

William Dorsey

Business

11 January, 10:17

Suppose that the United States fixes the dollar-pound exchange rate. In the process of maintaining the fixed exchange rate, if the U. S. central bank starts to realize reduced reserves of pounds, this suggests that_.

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Paxton · Answer 1

the fixed dollar-pound exchange rate is consistently below the equilibrium exchange rate that would be produced by a private foreign exchange market.

Explanation:

Fixing an exchange rate means that the government is trying to intervene in valuation of its currency. It is fixing it's currencie's rate to another and using reserves to handle fluctuations in market price.

When the fixed rate is below equillibrum there is surplus of the countrie's currency at the fixed rate. The government will buy this surplus (if not the value will fall) by selling their foreign currency reserves. This is done to maintain the fixed exchange rate.

Reduced reserves of pounds noticed by the Central bank is as a result of fixed price below equilibrium.