Figure 12.3 Market 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 12.3 Market 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 productivity growth in the US would mean that the supply of pounds in the market will decrease and the demand for pounds will increase. This would result in a shift in the supply curve to the left from S₀ to S₂ and a shift in the demand curve to the right from D₀ to D₁. Therefore, the new equilibrium point would lie at the intersection of the new supply and demand curves, which would correspond to a higher exchange rate for pounds.