The figure given below illustrates the market for British pounds. D_£ and S_£ are the demand and supply curves of the British pounds respectively. If the U.S. Federal Reserve uses a contractionary monetary policy, the _____ curve would shift right and the pound would tend to _____.

Question

Quizplus · Accepted Answer

Contractionary monetary policy leads to a decrease in the money supply, increasing the interest rates in the U.S. This would make it more expensive for U.S. citizens to borrow money and hence reduce their demand for British goods and services. As a result, the demand for British pounds would decrease, shifting the demand curve to the left. Therefore, the correct choice is C, where the S_£ curve would shift left, causing the pound to depreciate.

The Figure Given Below Illustrates the Market for British Pounds