Question

Suppose that political unrest in Egypt leads financial markets to anticipate a depreciation in the Egyptian pound. How will that affect the demand for pounds, supply of pounds, and exchange rate for pounds compared to, say, U.S. dollars?

a) Demand for pounds will decrease, supply of pounds will increase, and the exchange rate will rise compared to the U.S. dollar
b) Demand for pounds will increase, supply of pounds will decrease, and the exchange rate will fall compared to the U.S. dollar
c) Demand for pounds will decrease, supply of pounds will decrease, and the exchange rate will fall compared to the U.S. dollar
d) Demand for pounds will increase, supply of pounds will increase, and the exchange rate will rise compared to the U.S. dollar

Answer 1

Political unrest in Egypt leading to an anticipated depreciation in the Egyptian pound will decrease the demand for pounds, increase the supply of pounds, and cause the exchange rate for pounds compared to the U.S. dollar to rise.

Step-by-step explanation:

Political unrest in Egypt leading to an anticipated depreciation in the Egyptian pound will affect the demand for pounds, supply of pounds, and exchange rate for pounds compared to the U.S. dollar in the following way:

1. Demand for pounds will decrease: Anticipated depreciation in the Egyptian pound will make it less desirable to hold pounds, leading to a decrease in demand for pounds.
2. Supply of pounds will increase: As people anticipate a depreciation in the Egyptian pound, they will try to sell their pounds, leading to an increase in the supply of pounds.
3. Exchange rate for pounds will rise compared to the U.S. dollar: The increase in supply and decrease in demand for pounds will result in a decrease in the value of the pound compared to the U.S. dollar, leading to a higher exchange rate for pounds.