1.3.6 The exchange rate between the U.S. dollar and the British pound is a floating rate, with no government intervention.

If a large trade deficit with Great Britain prompts the United States to impose quotas on certain British imports, resulting in a reduction in the quantity of these imports, what will happen to the dollar–pound exchange rate? Why? (Hint: There is an excess supply of pounds, or an excess demand for dollars.) What effects will the change in the value of each currency have on employment and output in the United States? What about the balance of trade? (Ignore complications such as the J curve.)