Question

Suppose the Bank of England announces contractionary monetary policy while, at the same time, the Federal Reserve announces a more expansionary monetary policy. Everything else held constant, this would cause the U.S. dollar to________ against the UK pound.

Select one:

change ambiguously

remain constant

appreciate

depreciate

Answer 1

With the contractionary monetary policy stance of the Bank of England, the money circulation in the economy of England would go down. The real GDP would fall as a result of this there would be lower demand for US goods. The imports from the US would fall. The demand for the US dollar would decrease.

On the other hand, when the Federal Reserve announces a more expansionary monetary policy, it would mean there would be an increase in the real GDP in the US economy, which in turn would propel up the demand for England goods. Imports from England would increase. The demand for the UK pound would increase.

Thus, due to the market play of the demand and supply forces behind the US dollars and UK pounds, US dollars would depreciate against the UK pound

Hence, the correct answer is depreciate.