Question

A sudden increase in economic and political instability throughout Europe and Asia has caused the United States to appear to British residents to be relatively more economically and politically more stable than was previously the case. What will happen to the equilibrium dollar price of the pound, and why? Does the dollar appreciate or depreciate in relation to the pound?

Short answer

The equilibrium dollar price of the pound will remain the same and the dollar appreciates.

Step-by-step solution

Introduction

As the British individuals currently find the US strategically and financially more steady than Europe and Asia; they might want to exchange more with it. They will import more from the US.

Explanation

The interest for a dollar and the stock of the pound will ascend in the worldwide trade market, as has been shown by the shift of the pound supply bend from S to $S_1$. With the interest for the pound staying unaltered, the result will be a fall in the conversion scale of the pound regarding the dollar and an enthusiasm for the dollar concerning pounds.

Hence the equilibrium dollar price of the pound will remain the same and the dollar appreciates.