Question

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

Answer 1

Due to the exchange rate as the Feds reserve of pounds falls by 500 million pounds, then the supply of dollars will increase by $1250 million. As per the given exchange rate and the prevailing conditions.