Final answer:
The correct answer is option B. interest rates fall in the united states compared to those in britain.
Step-by-step explanation:
The demand for British pounds in the U.S. might increase due to various economic factors. The reasons from the given choices that could lead to an increased demand for pounds are:
- A. the U.S. price level decreases relative to Britain's: If goods are cheaper in the U.S., British consumers are likely to buy more American goods, increasing the demand for dollars and potentially decreasing the pound's value relative to the dollar. However, from the U.S. perspective, if British goods remain comparatively expensive, the demand for pounds may not necessarily increase.
- B. interest rates fall in the United States compared to those in Britain: Lower interest rates in the U.S. make investments less attractive compared to those in Britain, leading to an increase in demand for pounds as investors seek higher returns in the British market.
- E. tastes change and U.S. consumers buy fewer British automobiles: This would actually decrease the demand for pounds because U.S. consumers would be spending less on British goods.
Therefore, the correct answer is B, where a fall in U.S. interest rates, in comparison to British rates, would increase the demand for British pounds in the U.S.
Attempts to avoid currency depreciation, variations in interest rates, and consumer tastes all significantly impact foreign exchange markets and the relative demand for different currencies.