Exhibit 21-7 Foreign exchange market for U.S. dollars and British pounds Which of the following could cause the dollar-pound exchange rates to change as shown in Exhibit 21-7?

Question

Exhibit 21-7  Foreign exchange market for U.S. dollars and British pounds  Which of the following could cause the dollar-pound exchange rates to change as shown in Exhibit 21-7?

Quizplus · Accepted Answer

An increase in the U.S. price level while the British price level remains unchanged would lead to a decrease in the demand for U.S. dollars and an increase in the supply of U.S. dollars in the foreign exchange market, causing the exchange rate to depreciate (i.e., the value of the British pound in terms of U.S. dollars would increase). Therefore, choice C is the correct answer. The other choices are unlikely to cause a change in the exchange rates as shown in the exhibit.

Exhibit 21-7 Foreign Exchange Market for U