Multiple Choice QuestionIn a fixed exchange-rate system, if the U.S. government stopped honoring a fixed rate between the dollar and the British pound, then Blank______.Multiple choice question.the British government would become the dollar-pound exchange marketit would not be possible to exchange dollars and poundsa private market for foreign exchange would arise to take its placethe value of both currencies would drop
Question
Multiple Choice QuestionIn a fixed exchange-rate system, if the U.S. government stopped honoring a fixed rate between the dollar and the British pound, then Blank______.Multiple choice question.the British government would become the dollar-pound exchange marketit would not be possible to exchange dollars and poundsa private market for foreign exchange would arise to take its placethe value of both currencies would drop
Solution
The correct answer is: a private market for foreign exchange would arise to take its place.
Here's why:
In a fixed exchange-rate system, the government or central bank maintains the exchange rate at a certain level. If the U.S. government stopped honoring a fixed rate between the dollar and the British pound, it would mean that the exchange rate would no longer be controlled by the government.
This would not necessarily mean that it would be impossible to exchange dollars and pounds, nor that the British government would become the dollar-pound exchange market. Instead, a private market for foreign exchange would likely arise to take its place. In this market, the exchange rate would be determined by supply and demand.
The value of both currencies would not necessarily drop. The value of a currency in a floating exchange rate system is determined by the market, based on factors such as inflation, interest rates, and the balance of trade. So, the value of the dollar and the pound could go up or down, depending on these factors.
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