Which of the following causes the dollar to depreciate relative to the British pound? an increase...

Which of the following causes the dollar to depreciate relative to the British pound?

		an increase in the supply of pounds
		a decrease in the supply of dollars
		a decrease in the demand for dollars
		an increase in the demand for pounds

Expert Solution

The value of a currency in the foreign exchange market is determined by the forces of demand and supply.

If the demand for a currency rises, all other factors kept constant, its value appreciates.

If the supply of a currency rises, all other factors kept constant, its value depreciates.

Thus, the correct choice is:

a decrease in the demand for dollars

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Note:

The last choice, "an increase in the demand for pounds" -- is also correct. However, this effect will not be shown in the "market for dollars". In the demand-supply framework, only one currency's market can be shown.

Thus, if the dollar market is being analyzed, a decrease in the demand for dollars will shift the demand curve for dollars to the left, thus depreciating it.

If the pound market is being analyzed, an increase in the demand for pounds will similarly appreciate the pound (and therefore depreciate the dollar).

Thus to clarify, in the given question, it is being assumed that the "market for dollars" is being analyzed.

Rahul Sunny answered 2 years ago

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