/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q5. Suppose that the Fed is fixing t... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 21: Q5. (page 451)

Suppose that the Fed is fixing the dollar-pound exchange rate at $2.50 = 拢1. If the Fed鈥檚 reserve of pounds falls by 拢500 million, by how much would the supply of dollars increase, all other things equal?

Short Answer

Expert verified

The supply of dollars will increase by $1250 million if all things are equal.

Step by step solution

01

Official reserves of a country

The official reserves consist of stockpiles of various foreign currencies, bonds issued by foreign governments, gold reserves, and special reserves held at the international monetary fund.

The government of a country that adopts a fixed exchange rate assigns its central bank to carry out day-to-day FOREX market operations. It is a central bank鈥檚 task to exchange local currency for foreign currency and vice-versa to maintain the peg each day.

The stockpiles of foreign currencies are called foreign exchange reserves.

02

Surge in the supply of dollars

The fixed exchange rate for dollar and pound is $2.50 = 1 pound. Taking everything unchanged, the Fed鈥檚 reserve falls by 500 million pounds, due to which the supply of dollars will increase.

At this exchange rate, the number of dollars generated in the US economy will be 500 x 2.5 = $1250 million.

Thus, the supply of dollars will increase by $1250 million in the US economy.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

If a country such as Greece that has joined the European Monetary Union can no longer use an independent monetary policy to offset a recession, what sorts of fiscal policy initiatives might it undertake? Give at least two examples.

China had a $49.1 billion overall current account surplus in 2018. Assuming that China鈥檚 net debt forgiveness was zero in 2018 (its capital account balance was zero), by how much did Chinese purchases of financial and real assets abroad exceed foreign purchases of Chinese financial and real assets?

The exchange rate between the U.S. dollar and the British pound starts at \(1 = 拢0.5. It then changes to \)1 = 拢0.75. Given this change, we would say that the U.S. dollar has ______ while the British pound has _______.

a. depreciated; appreciated

b. depreciated; depreciated

c. appreciated; depreciated

d. appreciated; appreciated

What have been the major causes of the large U.S. trade deficits in recent years? What are the major benefits and costs associated with trade deficits? Explain: "A trade deficit means that a nation is receiving more goods and services from abroad than it is sending abroad." How can that situation be considered "unfavorable"?

Do all international financial transactions necessarily involve exchanging one nation鈥檚 distinct currency for another? Explain. Could a nation that neither imports goods and services nor exports goods and services still engage in international financial transactions?
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.