Question

Suppose the U.S. imports cars from the UK​ manufacturer, McLaren. Consider an appreciation of the pound. Which of the following statements correctly describe the effects of this​ change?

​(Check

all that

apply.​)

Hold all other prices constant.

A.

U.S. consumers pay more dollars for each McLaren car they import from the UK.

B.

McLaren supplies a greater quantity of dollars to the foreign exchange market.

C.

U.S. consumers increase their purchases of McLaren cars.

D.

​McLaren's dollar revenues fall.

To peg the pounds per dollar exchange rate at a level higher than the market clearing exchange​ rate, the UK government needs to

▼

a. buy pounds and sell dollars

b. buy dollars and sell pounds

c. simple announce a target exchange rate

Answer 1

(1) (A) and (D)

When pound appreciates, it takes more dollars to buy one pound, therefore British goods become costlier and US import demand for British cars decrease, leading to a fall in dollar revenue for the British firm.

(2) (a)

Buying pounds will increase the demand for pounds, shifting pound demand curve to right, appreciating pound. Selling dollar will increase supply of dollar, shifting dollar supply curve to right, which depreciates dollar and appreciates pound.