In a setting of flexible exchange rates, suppose that the U.S. citizens decrease their import purchases from the United Kingdom at the same time that British citizens increase their purchases of stocks and bonds in the United States. The first action (the U.S. imports) by itself would lead to __________ of the dollar against the pound; the second action by itself would __________ of the dollar against the pound.

Question

Quizplus · Accepted Answer

The decrease in U.S. imports from the UK would reduce the supply of dollars in the foreign exchange market, leading to an appreciation of the dollar against the pound. The increase in British purchases of U.S. stocks and bonds would increase the demand for dollars, further leading to an appreciation of the dollar against the pound.

In a Setting of Flexible Exchange Rates, Suppose That the U.S