Foreign Exchange Supply and Demand Paper

(5.0 pts) Draw the demand and supply curves for British pounds. Measure the quantity of British pounds on the horizontal axis and the $/£ on the vertical axis. Starting from an equilibrium exchange rate, assume the following two changes occur simultaneously: (1) the U.K interest rate increases relative to the U.S. interest rate and (2) the U.S. real income increases while that of the U.K. remains unchanged.How would these changes affect the dollar price of pound (i.e., $/£)?Will the British pound appreciate or depreciate.

Note that everything should be shown in one single graph and you must use arrows to show the effect of the change in the interest rate and real income on the demand and the supply curves.Provide an explanation.

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