Question

British citizens increase their appreciation for French wine and begin importing substantially more of it. Note that France is part of the European Monetary Union​ (EMU), which uses the Euro as its​ currency, while Britain is not part of the EMU and uses the pound as its currency.

What happens to the European Monetary​ Union's nominal exchange​ rate? The nominal exchange rate __"

A. Appreciates.
B. Depreciates.
C. Remains constant.
D. Fluctuates unpredictably.

Answer 1

When British citizens increase their appreciation for French wine and begin importing more of it, the nominal exchange rate depreciates(b).

Step-by-step explanation:

The nominal exchange rate depreciates (b) when British citizens increase their appreciation for French wine and begin importing substantially more of it. This is because France is part of the European Monetary Union (EMU) which uses the Euro as its currency, while Britain uses the pound as its currency. When British citizens import more French wine, they need to exchange their pounds for Euros, increasing the demand for Euros. As demand for Euros increases, the value of the Euro in relation to the pound decreases, resulting in a depreciation of the nominal exchange rate.