AP Macroeconomics 6.3.3: Exchange-Rate Disequilibrium

Identify excess demand or supply in foreign-exchange markets and predict currency adjustment.

[Maximum number: 1]

The United States and the United Kingdom are trad ing partners with flexible exchange rates. The cur rency of the United States is the dollar ($), and the currency of the United Kingdom is the pound (£). The graph provided shows the foreign exchange market for the pound. At an exchange rate of $2 per pound, which of the following will occur?

A

There will be excess supply of the dollar.

B

There will be excess demand for the pound.

C

The pound will appreciate.

D

The dollar will appreciate.

E

A £2 souvenir in Britain will cost $1 for United States tourists.

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MKT-5.D—Explain (using graphs as appropriate) how exchange rates adjust to restore equilibrium in the foreign exchange market question 1