True or False?
False! To shore up the pound, the Bank of England would have to lower the domestic money supply. The sale of foreign exchange reserves for British pounds would only accomplish this if the Bank does not sterilize the effects of this foreign exchange market intervention on the domestic money supply. In the event of sterilization, the effect on the external value of the pound would have been small or non-existent. The sale of reserves would have been matched by an equivalent purchase of domestic bonds so that the money supply would have been unaffected. The LM curve would not have shifted and nothing would therefore have happened to the nominal exchange rate. Some effect on British interest rates might have been possible but this would surely have been trivial in magnitude.