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UK Foreign Exchange Market Dynamics: Excess Demand for L and Government Transactions

This analysis examines the current dynamics within the UK's foreign exchange market concerning the demand and supply of currency, represented as L. It outlines the British government's actions in response to an excess demand for L, selling £50 million in currency to bolster official reserves, while also addressing an excess supply scenario by purchasing L20 million. Key market limits are detailed, along with a diagram illustrating the interplay between demand and supply in shaping trade and welfare implications for the UK economy.

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UK Foreign Exchange Market Dynamics: Excess Demand for L and Government Transactions

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  1. EXCESS DEMAND FOR L UK BOP +$50 BRITISH GOVERNMENT SELLS 50 L (BUYS $ FOR OFFICIAL RESERVES) EXCESS SUPPLY OF L 20 UK BOP -$20 BRITISH GOVERNMENT BUYS L 20 (SELLS $ FROM OFFICIAL RESERVES) $3.00/L Upper L Limit Lower L Limit $2.60/L D’ 10 30 70 120 The diagram below shows the demand for and supply of L in the British foreign exchange market $/L S $2.80/L D Q 50 QUANTITY OF L Trade and welfare

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