When the German mark depreciated below its floor vs. the British pound, the Bank of England had to:

Question

BlackTom AI · Accepted Answer

To support a currency that has fallen below a maintained floor, the central bank must buy the weak currency and sell the stronger currency to restore the floor.

1) Relevant knowledge points and concepts
- Fixed/floor exchange rate defense: when one currency is too weak relative to a target, the defending central bank intervenes in FX markets to increase demand for the weak currency.  
- Central bank balance-sheet effect: buying a foreign currency increases the central bank’s foreign exchange assets (reserves); selling domestic currency supplies domestic currency to the market.  
- Which currency is “domestic”: for the Bank of England (BoE) the pound is domestic and the German mark is the foreign currency.

2) Step-by-step reasoning
- The mark depreciates below its floor versus the pound (mark is too weak).  
- To raise the mark’s value, the BoE must increase demand for marks: it buys marks in exchange for pounds.  
- The BoE therefore supplies pounds to the market (sells pounds) and acquires marks on its balance sheet.

3) Balance-sheet/intermediate steps
- Transaction: BoE buys X marks by paying X pounds.  
- Assets: foreign reserves (marks) increase by X.  
- Liabilities / base money: pounds are supplied to the market (the BoE has effectively sold pounds).  
- Net effect on official foreign reserves: +X marks (reserves increase).

4) Why the correct answer is correct
- Buying marks directly supports the mark’s value; selling pounds provides the currency the BoE uses to purchase marks. Acquiring marks increases the BoE’s holdings of foreign currency reserves, so reserves are gained.

5) Why the other options are incorrect
- (b) buy pounds, sell marks, losing reserves: That would support the pound (not the mark) and would reduce foreign reserves only if the BoE sold foreign assets; it does not match the needed action.  
- (c) buy marks, sell pounds, losing reserves: buying marks increases foreign reserves, not decreases them, so “losing reserves” is wrong.  
- (d) buy pounds, sell marks, gaining reserves: buying pounds would weaken the mark further, opposite of defending the mark’s floor; also selling marks would reduce reserves, not gain them.

6) Conclusion
The Bank of England had to buy marks and sell pounds, thereby increasing its foreign reserves. This matches option a.

When the German mark depreciated below its floor vs. the British pound, the Bank of England had to:Single choice

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