Question

Consider the following, all of which will affect the demand for pounds on foreign exchange markets or the supply of pounds on foreign exchange markets (either one or the other – never both)

State what the effect of each of them will be (will it increase it or reduce it?)

a) There is an increase in demand in Britain for Renault motor cars
b) French consumers start to buy British beef again.
c) LEB (the London Electricity Board) is purchased by EDF (Electricité de France)
d) Large numbers of Russian students come to Britain to study.
e) EDF pays a large dividend to shareholders. Some shares in EDF are owned by a British pension fund.

Answer 1

a) supply of pounds on foreign exchange markets increase.
Renault motor cars are manufactured in France. When demand for Renault motor cars increases demand for Euro rises. Hence consumers will sell Pounds in order to purchase Euros. So supply of pounds in the foreign exchange markets increases.

b) demands of pounds on foreign exchange markets increases.
When demand for British beef increases French consumers will have to pay British beef sellers in pounds so they will sell Euros and purchase Pounds. So demand of pounds in the foreign exchange markets increases.

c) demand of pounds on foreign exchange markets increases.
When EDF purchases LEB it would require to pay a huge amount of pounds to LEB. So it would purchase pounds by selling Euros. So demand of pounds on foreign exchange markets increase

d)demand of pounds on foreign exchange markets increases.
When Russian students visit Britain for studies they would require to incur expenses from Pounds. So they will have to sell their Russian Roubles and purchase pounds. Hence demand for pounds increases.

e) demand of pounds on foreign exchange markets increases.
When EDF need to pay LEB' s pension fund it would be in pounds. So it would purchase pounds by selling Euros. So demand of pounds on foreign exchange markets increase