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British pound to US dollar exchange rate (value of one pound in dollars), June 2017 to June 2019 - Edexcel - A-Level Economics A - Question 3 - 2021 - Paper 2
Question 3
British pound to US dollar exchange rate (value of one pound in dollars), June 2017 to June 2019. Which one of the following has been the overall change in the Brit... show full transcript
Worked Solution & Example Answer:British pound to US dollar exchange rate (value of one pound in dollars), June 2017 to June 2019 - Edexcel - A-Level Economics A - Question 3 - 2021 - Paper 2
Step 1
Identify the overall change in the British pound to US dollar exchange rate
Answer
To determine the overall change in the British pound to US dollar exchange rate from 1st January 2018 to 1st January 2019, we first need to analyze the graph provided.
From the graph, we can see that on 1st January 2018, the value of one pound was approximately 1.25. This indicates that the value of the pound has fallen relative to the dollar during this period.
Given the choices:
- A (Appreciation) is incorrect because the pound has fallen in value.
- B (Depreciation) is correct as it reflects the decline in value of the pound.
- C (Devaluation) is incorrect as the pound-dollar pair operates in a floating exchange rate system.
- D (Revaluation) is also incorrect for the same reason.
Thus, the only correct answer is B (Depreciation).
Step 2
Explain the implications of depreciation on the UK current account balance
Answer
The depreciation of the British pound affects the UK current account in several ways:
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Increase in Exports: A weaker pound makes UK goods cheaper for foreign buyers, potentially increasing demand for UK exports.
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Decrease in Imports: Conversely, imports become more expensive for UK consumers, which may lead to a reduction in the volume of imports.
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Overall Current Account Improvement: With increased exports and decreased imports, the UK current account may experience an improvement, leading to a reduction in the deficit.
This analysis highlights the interconnectedness between exchange rates and trade balances.