In 1990 The United Kingdom joined the European Rate Mechanism (designed for member countries to maintain stable exchange rate to facilitate trade) and pegged the British Pound Sterling to the German Deutch Mark: / 2.95. At the same time, the UK's inflation rate was more than double that of Germany and the United States.

1. use the ppp relationship to discuss the effect that you ( and other potential currency speculators at the time) would EXPECT the countries inflation rates would normally have on exchange rates.
2. Over the next couple of years, rising prices lowered the Pound's value at home, but purchase by the Bank of England maintained their Ex. Rate commitment.
3. Use a simple supply-demand figure, for the market for POUNDS, to show the effects of his waning demand for (or rising supply of) Pounds and the Bank's response (HINT: you can think about the Bank's response as trying to maintain a binding price floor).