The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:
A) U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B) U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C) U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D) U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
E) U.S. demand for pounds would be equal to the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

Question

Quizplus · Accepted Answer

According to the question, the equilibrium exchange rate of pounds is $1.70. This means that at this exchange rate, the demand for pounds from the U.S. would be equal to the supply of pounds for sale. However, at an exchange rate of $1.72 per pound, the exchange rate is higher than the equilibrium exchange rate of $1.70. This means that the pound is overvalued compared to the U.S. dollar. As a result, U.S. demand for pounds would be less than the supply of pounds for sale, and there would be a surplus of pounds in the foreign exchange market. Therefore, the best choice is D.

The Equilibrium Exchange Rate of Pounds Is $1