Those individuals and businesses demanding the excess ( Q 1 − Q 2) will leave the market empty-handed. ![]() In this case, suppliers of pounds will come to the market with Q 2 quantity of pounds, but many people who would like to buy pounds will not find a willing supplier. Suppose further that demand for pounds ( Q 1) on the private Forex exceeds supply ( Q 2) at the official fixed exchange rate, but the central bank does not intervene to correct the imbalance. This is indicated in Figure 11.3 "Conditions for a Black Market" as a horizontal line drawn at Ē $/£. Suppose the United States fixes its exchange rate to the British pound at the rate Ē $/£. Let’s consider why a black market may arise. A black market arises, however, when exchanges for foreign currency take place at an unofficial (or illegal) exchange rate. Surely the government could simply mandate that all Forex transactions take place at the official fixed rate and implement severe penalties if anyone is caught trading at a different rate. However, we might consider what would happen if the central bank did not intervene. Till now we have said that a central bank must intervene in the foreign exchange (Forex) market whenever there is excess demand or supply of foreign currency. Learn the five different reasons why trade between countries may occur.
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