The figure given below depicts the foreign exchange market for British pounds traded for U.S.dollars. Figure 36.2 Refer to Figure 36.2.Suppose the British central bank is committed to maintaining an exchange rate of £1 = $1.50, but there is a permanent shift in supply from S₁ to S₃.According to the Bretton Woods agreement: A)the pound should be devalued. B)the dollar should be devalued. C)the British central bank should buy pounds in exchange for dollars. D)the British central bank should encourage speculation. E)the Fed should intervene to maintain the exchange rate of £1 = $1.

Question

Quizplus · Accepted Answer

According to the Bretton Woods agreement, if there is a permanent shift in supply which results in a surplus of pounds, the pound should be devalued to maintain the fixed exchange rate of £1 = $1.50. Therefore, choice A is the correct answer. The British central bank could devalue the pound by reducing the amount of dollars it is willing to exchange for each pound, which would effectively increase the price of dollars in terms of pounds. This would help to restore equilibrium in the market and maintain the fixed exchange rate.

The Figure Given Below Depicts the Foreign Exchange Market for British