Question

The United Kingdom produces computers and sells them to Japan. At the same time Japan produces cars and sells them to the United Kingdom. Suppose there is an appreciation in the pound. This will​ cause:

A. An increase in imports into the United Kingdom and an increase in exports to Japan, which will cause an increase in aggregate demand and real GDP.

B. A decrease in imports into the United Kingdom and an increase in exports to Japan, which will cause an increase in aggregate demand and real GDP.

C. An increase in imports into the United Kingdom and a decrease in exports to Japan, which will cause a decrease in aggregate demand and real GDP.

D. A decrease in imports into the United Kingdom and a decrease in exports to Japan, which will cause a decrease in aggregate demand and real GDP.

Answer 1

The United Kingdom produces computers and sells them to Japan. At the same time Japan produces cars and sells them to the United Kingdom. Suppose there is an appreciation in the pound. This will​ cause: an increase in imports into the United Kingdom and a decrease in exports to Japan, which will cause a decrease in aggregate demand and real GDP - Option C.

Step-by-step explanation:

Option C is the correct answer choice, the reason being that an appreciation in the value of the pound will mean that the UK's goods will look more costly. This will mean that imports of foreign goods into the UK will rise whereas exports of UK goods will fall.