Figure 15.2 Market for the British Pound
-Refer to Figure 15.2.Suppose the United States decreases financial investment in England.Other things equal, under a floating exchange rate system the new equilibrium exchange rate would be

Question

Figure 15.2 Market for the British Pound 
-Refer to Figure 15.2.Suppose the United States decreases financial investment in England.Other things equal, under a floating exchange rate system the new equilibrium exchange rate would be

Quizplus · Accepted Answer

If the United States decreases financial investment in England, it implies that there would be less demand for British pounds, and the demand curve for the British pound would shift to the left. This would cause the exchange rate to depreciate as there would be a surplus of pounds in the market. Therefore, the new equilibrium exchange rate would be lower than the initial rate of $0.80 per franc. Option B, $0.60 per franc, is the closest option that represents a depreciation of the currency.