Narrbegin Exhibit 18.5 Foreign exchange market for US dollars and British pounds
-Which of the following could cause the dollar-pound exchange rate to change as shown in Exhibit 18.5?

Question

Narrbegin Exhibit 18.5 Foreign exchange market for US dollars and British pounds 
-Which of the following could cause the dollar-pound exchange rate to change as shown in Exhibit 18.5?

Quizplus · Accepted Answer

Inflation in the US (a rise in the US price level) would cause the demand for the dollar to fall and the supply of pounds to rise, leading to a depreciation of the dollar and an appreciation of the pound. This would cause the exchange rate to shift from E1 to E2 as shown in the exhibit. The other options presented are unlikely to cause a change in the exchange rate as shown in the exhibit.