Asked by Thompson Stockmann on Jul 09, 2024
Verified
Suppose interest rates fall sharply in the United States but are unchanged in Great Britain. Other things equal, under a system of floating exchange rates, we can expect the demand for pounds in the United States to
A) decrease, the supply of pounds to increase, and the dollar to appreciate relative to the pound.
B) increase, the supply of pounds to increase, and the dollar may either appreciate or depreciate relative to the pound.
C) increase, the supply of pounds to decrease, and the dollar to depreciate relative to the pound.
D) decrease, the supply of pounds to increase, and the dollar to depreciate relative to the pound.
Floating Exchange Rates
A system in which currency values are allowed to fluctuate according to foreign exchange market mechanisms without direct intervention by the country’s government.
Interest Rates
The cost of borrowing money, typically expressed as a percentage of the amount loaned, which lenders charge borrowers.
Demand For Pounds
The desire or need for a given amount of a commodity, such as currency or weight, by consumers or businesses.
- Acquire knowledge on how investment movements and central bank actions affect exchange rates within variable and stable monetary frameworks.
- Understand the impact of macroeconomic variables such as inflation and interest rates on exchange rates in flexible exchange rate systems.
Verified Answer
KJ
Kisanthy JeyakumarJul 14, 2024
Final Answer :
C
Explanation :
When interest rates fall in the United States but remain unchanged in Great Britain, investors will find British assets more attractive, increasing the demand for pounds to buy those assets. The supply of pounds might decrease as investors hold onto their pounds or convert other currencies into pounds, expecting higher returns in Britain. This increased demand for pounds, coupled with a potentially reduced supply, would lead to the depreciation of the dollar relative to the pound.
Learning Objectives
- Acquire knowledge on how investment movements and central bank actions affect exchange rates within variable and stable monetary frameworks.
- Understand the impact of macroeconomic variables such as inflation and interest rates on exchange rates in flexible exchange rate systems.