Question

Consider the market for the British pound sterling (GBP). Note that although the United Kingdom (Great Britain) is an official member of the European Union, it has chosen not to adopt the euro as its official currency. For each of the following, determine whether the situation described is part of the supply, demand, or neither side in the foreign exchange market for GBP.

a. John and Adam are British economists who are going to Washington, D.C. for an economics conference.

     In the foreign exchange market for GBP, John and Adam are part of (supply, both supply and demand, demand, neither supply or demand).

b. An American pharmaceutical firm buys a smaller competitor based in London.

     In the foreign exchange market for GBP, the American pharmaceutical firm is part of (supply, both supply and demand, demand, neither supply or demand).

c. Louise, who lives in France, is going on a vacation to Germany.

     In the foreign exchange market for GBP, Louise is part of (supply, both supply and demand, demand, neither supply or demand).

d. Raj, who moved to Great Britain from India to work as an engineer, sends some of his paycheck each month to his parents in India.

     In the foreign exchange market for GBP, Raj is part of (supply, both supply and demand, demand, neither supply or demand).

e. An economics class from the United States is traveling to Great Britain as part of a study-away program.

     In the foreign exchange market for GBP, these students are part of (supply, both supply and demand, demand, neither supply or demand).

Answer 1

a. John and Adam are British economists who are going to Washington, D.C. for an economics conference. Supply

Since, they will be required to exchange GBP for US $. Thus, they will be supplying British Pound.

b. An American pharmaceutical firm buys a smaller competitor based in London. In the foreign exchange market for GBP, the American pharmaceutical firm is part of Demand.

The American firm will be buying the UK based small firm. SO, they will be required to pay British Pound. Thus, they will be demanding Pound.

c. Louise, who lives in France, is going on a vacation to Germany.

In the foreign exchange market for GBP, Louise is part of neither supply or demand.

He is going to Germany and is from France. Therefore he will not be buying or selling the British pound.

d. Raj, who moved to Great Britain from India to work as an engineer, sends some of his paycheck each month to his parents in India.

In the foreign exchange market for GBP, Raj is part of Supply.

He will be exchanging British pound for Indian currency therefore, he is a part of supply.

e. An economics class from the United States is traveling to Great Britain as part of a study-away program.

In the foreign exchange market for GBP, these students are part of demand.

They will be exchanging Dollar for British pound thus they are a part of demand.

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