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The diagram shows the demand and supply conditions for pound (£) sterling
The diagram shows the demand and supply conditions for pound (£) sterling. UK authorities are committed to maintaining the exchange rate of the £ sterling against the US dollar between ei and ez. S price of £ sterling in US $ e2 ei D2 D1 quantity of £ sterling Which of the following combination correctly explains the change in the demand from Di to D2 and the policy action that UK authorities might take? event in the UK policy action taken by UK authorities ? a fall in budget deficit B a rise in capital inflows purchase sterling and buy US dollar sell sterling and buy US dollar abolish export subsidies ? a rise in national income D a fall in the aggregate price level increase the use of import tariff ??. ? ??. ? ??. ? ODD
Expert Solution
correct answer is B
An increase in capital inflow will increase demand of sterling which shift sterling demand rightward
Exchange rate now lies outside the band(appreciation of sterling)
To reverse appreciation ,UK authorities need to increases supply of Sterling and increases demand of US dollar to decreases the value of sterling
since you dont require lenghtly explanation i am not explaining incorrect option
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