Question

to force the value of the pound to appreciate against the dollar, the federal reserve should: a. sell dollars for pounds in the foreign exchange market and the european central bank (ecb) should sell dollars for pounds in the foreign exchange market. b. sell pounds for dollars in the foreign exchange market and the european central bank (ecb) should sell dollars for pounds in the foreign exchange market. c. sell pounds for dollars in the foreign exchange market and the european central bank (ecb) should not intervene. d. sell dollars for pounds in the foreign exchange market and the european central bank (ecb) should sell pounds for dollars in the foreign exchange market.

Answer 1

The Federal Reserve should sell dollars for pounds on the foreign currency market, and the European Central Bank (ECB) should also do the same. This will cause the value of the pound to rise versus the dollar.

What occurs when the value of the pound rises relative to the dollar?

A rise in value will usually result in less inflation. This could increase the competitiveness of UK goods, resulting in longer-term increases in exports, which could boost the current account. The elasticity of demand determines the effect on the current account.

Interest rates are the main factor influencing the strong pound. The two frequently go hand in hand: the more attractive a country's currency is to foreign investment, which in turn strengthens the pound, the higher its interest rate.

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