Let the demand for British pounds and the supply of British pounds be described by the following…

Let the demand for British pounds and the supply of British pounds be described by the following equations:

Demand for pounds = 10 – 2e

Supply of pounds = 4 + 3e,

where the quantities are in millions of pounds and e is dollars per pound.

a. Find the equilibrium exchange rate.

b. Suppose the U.S. government intervenes in the foreign currency market and uses U.S. dollars to buy 2 million pounds. What happens to the exchange rate? Why might the U.S. government do this?

 

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