Assume a fixed exchange rate between the GBP (£) and USD ($) and that, resulting from a shock in the demand of £, the £ appreciates against the $. Explain how the Bank of England can intervene to re-establish the exchange rate at its initial level and the effect of that intervention. In your answer distinguish between non-sterilized and sterilized interventions.
Added by Alfredo R.
Step 1
This would increase the supply of GBP in the market and decrease the demand for USD, causing the GBP to depreciate against the USD. Show more…
Show all steps
Your feedback will help us improve your experience
Haricharan Gupta and 89 other Microeconomics educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Key Concepts
Recommended Videos
Imagine that the UK adopts the euro, and interest rates are set by the European Central Bank. (a) Are euro interest rates likely to be adjusted to help stabilize either UK inflation or UK output? (b) What automatic mechanisms, if any, can still achieve these outcomes? (c) Would UK fiscal policy be able to help more?
"Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to appreciate with respect to the U.S. dollar: Which of the following interventions is most likely in this situation? The government of Britain should sell pounds and buy dollars The government of Britain should do nothing, as a fixed rate cannot change. The government of Britain should buy pounds and sell dollars. The government of Britain should decrease the country's money supply:"
Jonathan T.
Suppose that the United States decides to fix the dollar-euro exchange rate. If the U.S. central bank observes that the quantity supplied of euros exceeds the quantity demanded of euros at the fixed exchange rate, to maintain the exchange rate, the U.S. central bank will A.) realize a decrease in its reserves of euros. B.) need to appreciate the dollar. C.) realize an increase in its reserves of euros. D.) need to reduce the domestic supply of dollars.
Joanna Q.
Recommended Textbooks
Principles of Economics
Principles of Microeconomics for AP® Courses
Economics
Transcript
18,000,000+
Students on Numerade
Trusted by students at 8,000+ universities
Watch the video solution with this free unlock.
EMAIL
PASSWORD