The following two figures depict the demand and supply of U.S. dollars and the demand and supply of British pounds in the foreign currency exchange market. Use these figures to answer the next questions:
-Assume that the same event caused demand for U.S. dollars to decrease and demand for British pounds to increase and that both of these graphs describe that event. Approximately what is Y₁?

Question

The following two figures depict the demand and supply of U.S. dollars and the demand and supply of British pounds in the foreign currency exchange market. Use these figures to answer the next questions:

-Assume that the same event caused demand for U.S. dollars to decrease and demand for British pounds to increase and that both of these graphs describe that event. Approximately what is Y₁?

Quizplus · Accepted Answer

Y₁ represents the exchange rate between U.S. dollars and British pounds. Looking at the graphs, we can see that a decrease in demand for U.S. dollars and an increase in demand for British pounds would lead to a decrease in the exchange rate, meaning that each U.S. dollar can buy fewer British pounds. Based on the graphs, this decrease is approximately from 1.40 (where the demand and supply curves intersect) to 1.00 (where the new demand and supply curves intersect). Therefore, the change in the exchange rate is $1.00-$0.71 = $0.29. Since this represents a decrease of U.S. dollars, we need to take the reciprocal to get the answer in terms of British pounds per dollar, which is approximately 1/$0.71 = $1.41. So Y₁ is approximately $1.41. However, the answer choices are rounded, so the closest option is B, $0.71.

The Following Two Figures Depict the Demand and Supply of U.S