Question

1. Suppose that the United States fixes the dollar-pound exchange rate. In the process of maintaining the fixed exchange rate, the U.S. central bank regularly finds itself in a position of having to increase its reserves of pounds. Based on this, we could conclude that

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

the U.S. central bank is regularly having to reduce the domestic money supply.

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

the fixed dollar-pound exchange rate is a good approximation of the exchange rate that would be produced by a private foreign exchange market

2. When it is reported that a nation is experiencing a "balance of payments deficit," this is best interpreted to mean that the nation is experiencing

an imbalance between its current account and its capital and financial account.

a decrease in foreign exchange reserves.

a situation where it is importing more goods than it is exporting.

an increase in foreign exchange reserves.

.

Answer 1

1) If the Fed has to maintain the reserve of the pound that means the supply of the pound is more than the demand of the pound. This can only happen when the exchange rate equilibrium is above the equilibrium price.

The correct answer to this question is "A" The fixed dollar-pound exchange rate consistently exceeds the equilibrium exchange rate that would be produced by a private foreign exchange market.

2) If a nation imports more goods than they are exporting they will experience a balance of payment deficit. The correct answer to this question is "C". A situation is where it is importing more goods than it is exporting.