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Exchange Rates of British Pounds

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Determining the Exchange Rate
Use these data to answer the following questions about the market for British pounds:
Price of pound Quantity Demanded Quantity Supplied
(in $) (of pounds) (of pounds)
________________________________________
$4.00 50 100
$3.00 75 75
$2.00 100 50
a. Draw the supply and demand curves for pounds, and determine the equilibrium exchange rate (dollars per pound).
b. Suppose that the supply of pounds doubles. Draw the new supply curve.
c. What is the new equilibrium exchange rate?
d. Has the dollar appreciated or depreciated?
e. What happens to U.S. imports of British goods?

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This solution determines the exchange rate based on supply and demand.

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Part A

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The equilibrium exchange rate (quantity demanded = quantity supplied = 75 pounds) is ...

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