Figure 12.3Market for British Pounds

-Consider Figure 12.3.The market is initially governed by demand curve D0 and supply curve S0.Suppose US productivity growth is faster than the UK,which supply and demand curves depict the new situation?

Question

Figure 12.3Market for British Pounds
 
-Consider Figure 12.3.The market is initially governed by demand curve D0 and supply curve S0.Suppose US productivity growth is faster than the UK,which supply and demand curves depict the new situation?

Quizplus · Accepted Answer

Faster US productivity growth would lead to an increase in the supply of US dollars, which would shift the supply curve for British pounds to the right from S0 to S2. At the same time, the demand for British pounds would decrease as US consumers would now find it relatively cheaper to purchase US goods due to increased productivity. This would shift the demand curve for British pounds to the left from D0 to D1. Therefore, the new situation would be governed by supply curve S2 and demand curve D1.