Final answer:
An increase in British demand for U.S. products leads to a stronger dollar and can raise the equilibrium quantity in international currency markets, as more dollars are needed to complete transactions.
Step-by-step explanation:
Currency Exchange Dynamics:
An increase in British demand for U.S.-produced products will generally increase the value of the dollar and raise the equilibrium quantity of dollars in the international exchange markets. Taking into account the principles of supply and demand in currency markets, when demand for U.S. products increases, international buyers need more U.S. dollars to complete their purchases. This increased demand for dollars causes the exchange rate to rise, meaning the dollar appreciates. Conversely, the value of other currencies relative to the dollar decreases.
Reflecting on an example scenario where the U.S. government increases its borrowing from European financial investors, there is a significant change in both demand and supply of U.S. dollars (D and S respectively) in foreign exchange markets. Specifically, the demand curve shifts to the right from Do to D1, and the supply of U.S.