CAPE Economics, June 2004, Unit 2, Paper 2 suggested answer by Edward Bahaw

EDWARD BAHAW CAPE ECONOMICS PAST PAPER SOLUTIONS

CAPE
ECONOMICS
th
May 27 2004
Unit 2
Paper 2



June 2004 – Unit 2 – Paper 2

1 a i) Percentage increase in Nominal Gross Domestic Product (1990 – 2002)

5672.6 - 2708.0 100
= × = 109.5%
2708.0 1

1 a ii) Percentage increase in Real Gross Domestic Product (1990 – 2002)

4848.8 - 3776.3 100
= × = 28.4%
3776.3 1

1 b i) 1 b ii)
Real GDP Real Potential
Nominal (1997 GDP (1997 Growth in Growth in
Year GDP Price) Price) Output Gap Nominal GDP Real GDP
1990 2708 3776.3 3912.9 -136.6
1992 3149.6 3760.5 4090.9 -330.4 16.3% -0.4%
1994 3777.2 4148.3 4267.9 -119.6 19.9% 10.3%
1996 4268.6 4404.5 4499.8 -95.3 13.0% 6.2%
1998 4900.4 4718.6 4658.4 60.2 14.8% 7.1%
2000 5513.8 4884.9 4966 -81.1 12.5% 3.5%
2002 5672.6 4848.8 5092.7 -243.9 2.9% -0.7%

1 c i) 1 c ii)

Year Output Gap Recessionary Gap/Inflationary Gap
1990 -136.6 Recessionary Gap
1998 60.2 Inflationary Gap

1 c iii) Inflationary Gap
An inflationary gap existed in the year 1998.

1 d) Given the decline in real GDP between 2000 and 2002, the economy is in the
recession stage of the business cycle.



2 a i)
Real Income Consumption Savings
0 800 -800
2500 2800 -300
5000 4800 200
7500 6800 700
10000 8800 1200

2 a ii) Marginal Propensity to consume (MPC)

MPC = ∆C/∆Y = 2000/2500 = 0.8

2 a iii) The Multiplier (K)

K = 1 /(1 − MPC ) = 1 /(1 − 08) = 1 / 0.2 = 5

2 a iv) Equilibrium Level of Income

AE = C + I + G + X - M

C = 800 + 0.8Y
I = 500
G = 200
X=0
M=0

∴ AE = 800 + 0.8Y + 500+ 200
AE = 1500 + 0.8Y

At Equilibrium: Y = AE

∴ Y = 1500 + 0.8Y

Y - 0.8Y = 1500
0.2Y = 1500
Y = 1500/0.2 = 7500

The equilibrium level of national income is $7,500 million.

2 a v) Closed economy. This is because exports and imports are zero meaning that the
country does not take part in international trade.

2 b i) Inverse relationship between aggregate demand (AD) and the average price level.
As the average price level increase or decreases, there is a movement along the
downward sloping AD curve. Changes in the price level typically affect aggregate



demand indirectly via its influence over intermediary variables. There are basically three
main intermediary variables and their effects on each of the components of aggregate
demand are now outlined.
1. Interest rate: If the price level rises, then the demand for money increases and as a
consequence the rate of interest rises. As a result consumers are faced with higher
expenses. In particular higher interest rates would make consumers’ loan more costly
and it would therefore make it more expensive for consumers to buy ‘big ticket’ items
such as consumer durables e.g., new cars, which are typically bought by consumer
loans or through hire purchase. Similarly, increased interest rates would make it more
expensive for firms to borrow funds and thus private investments are likely to
decrease as well.
2. Relative prices between domestic and foreign goods and services: As the domestic
price level rises, home produced goods become more expensive relative to goods
produced in foreign countries. This has the effect of lowering export competitiveness
which leads to a fall in exports. Furthermore, higher prices in the domestic economy,
with foreign prices unchanged, would encourage consumers to purchase more
imported goods and services. Conclusively, higher prices would cause exports to fall
and imports to rise thus casing the level of aggregate demand to decrease.
3. Changes in real wealth: As the average price level increases, the real value of a
person’s wealth may fall. As a result, people may feel less well off, and this may
prompt them to consume fewer goods and services which reduce aggregate demand.

2 b ii) Three Other factors which affect aggregate demand
1. Taxation
2. Government spending
3. Business confidence or expectations

2 b iii) Three Other factors which affect aggregate demand
1. Taxation – A decrease in the rate of taxation, whether direct or indirect will have the
effect of increasing AD whatever the price level, as consumers would have more
disposable income to spend. Reduced corporation taxes or businesses taxes may make
previously unfeasible investments profitable and thus result in higher investment.
2. Government spending – An increase in Government expenditure, one of the
components of aggregate expenditure in the economy at unchanged prices would
certainly increase aggregate demand causing it to shift to the right.
3. Business confidence or expectations – A major determinant of investments is
expectations on the part of entrepreneurs. Expectations about the future can have a
significant bearing on the overall level of business confidence. Regardless of the price
level or rate of interest, firms will invest if they are optimistic about the future and
will not invest if they have a pessimistic outlook. Thus, if firms are very confident
about the future, then investments would rise and the aggregate demand would shift
to the right.



2 b iv) Difference between Keynesian and Classical Aggregate Supply Curve
The classical aggregate supply (AS) curve makes a distinction between the short run and
the long run while the Keynesian does not.

Short Run Classical Aggregate Supply Curve
According to the Classical AS curve in the short run, firms suffer from diminishing
returns from their fixed factor, which contributes towards rising costs of production.
These higher costs of production would induce firms to increase prices as output expands
in order to pass on cost increases to consumers. This means the short run aggregate
supply curve (SRAS) would be upward sloping in the short run.

Classical Short Run Aggregate Supply
Price Level
(P) SRA
S
P2

P1

Y1 Y2 Y = Real Output

Long Run Classical AS Curve
According to Classical economic theory, in the long run the economy would be at a point
on its production possibility frontier producing at its potential or full employment output
level with its given resources. Classical economists therefore contend that the long run
aggregate supply (LRAS) curve is vertical at the full employment level of output (YF). In
these circumstances there is absolutely no spare capacity in the economy and any
increase in aggregate demand leads to increased prices with no increase in output.

Classical Long Run Aggregate Supply
P LRAS

B
P2

A
P1

YF
Y=Real Output



Keynesian Aggregate Supply
Along the Keynesian aggregate supply curve there is a horizontal portion which signifies
that there is excess capacity in the economy and idle resources exist. Over this section of
the aggregate supply curve shown in red, output can be expanded without the average
level of prices increasing.

In the blue section, the aggregate supply curve is upward sloping which implies that the
economy as a whole is approaching maximum capacity. In this situation there would be
increased pressure on the labour market, as nearly everyone has a job, and wages will
begin to rise as firms have to offer more to attract workers. This in turn will cause cost of
production to increase which leads to an increase in the prices of final output.

The aggregate supply curve then becomes vertical as shown in green which depicts the
attainment of full capacity by all firms. This is where output has reached its maximum
and cannot be increased any further. This evidently occurs when the full employment
level of income (YF) exists in the economy.
Keynesian Aggregate Supply

P AS

P4 E

P3 D
C
P2
A B
P1

Y1 Y2 Y3 YF
Y

3 a i) Money can be defined as anything that is generally accepted in payment for goods
and services and in repayment of debts.

3 a ii) Two Types of Money
 Commodity money. This is any money which has intrinsic value. That is the
money is made from a commodity itself which has value. Examples of



commodities that have been used as mediums of exchange include gold, silver,
copper, salt, peppercorns, large stones, decorated belts, shells, cigarettes etc.
 Representative money. Instead of money being made from a commodity, a token
such as a paper note can be used as a symbol of the commodity. Such money is
referred to as representative money is. Representative money is therefore backed
by an underlying commodity which is where it derives its value. The name of the
commodity which the token represents is usually stated on it. Representative
money replaced commodity money as the later presented challenges mainly in
terms of portability.

3 a iii) Motives for demanding Money
1. Transactionary motive – this refers to amount of money held for daily use to carry out
routine transactions.
2. Precautionary motive – this accounts for money held for unforeseen expenditures or
unforeseen contingencies.
3. Speculative motive – this is any money held in excess of the transactionary and
precautionary motive and accounts for any money held in the hope of either making a
speculative gain, or avoiding a possible loss as a result of a change in the interest rate
and hence the price of financial assets.

3 a iv) Transactionary motive – As an individual receives his monthly income, say at the
end of January, he would spend some immediately and hold a portion of it throughout the
month of February in order to carry out daily expenditure over that period. In economic
jargon, the timing of the receipt of income and daily expenditure are not perfectly
synchronized. As a result individuals must hold a proportion of their income throughout
the month in order to fulfil daily transactions. In general, money held for the
transactionary motive tends to increase with income. It is however, not affected by
changes in the interest rate which means that the transactionary demand for money is
perfectly interest inelastic. These characteristics are shown in panel A and B of the figure.

Panel A: Positively related to Pane B: Not affected by the
Income Interest Rate
M IR
TB TB

Y
M

Speculative motive – this is any money held in excess of the transactionary and
precautionary motive. For example, if the total amount of money held by an individual is
$1,100 and his transactionary and precautionary balances are $500 and $200 respectively,



then his speculative balance is $400. The speculative motive for holding money, is
distinct from the other two, in that it accounts for any money held in the hope of either
making a speculative gain, or avoiding a possible loss as a result of an expected change in
the interest rate and hence the price of financial assets. There is an inverse relationship
between the demand for money for speculative purposes and the rate of interest as shown
in the figure.

IR
(%
1
0

5
SB

M
400 600

3 b i a) Commercial banks, accepts deposits from savers and uses these funds to make
loans to borrowers. In the banking system though as money is lent to a borrower it is
subsequently used to purchase a good or a service. As it changes hands from the
borrower/buyer to the seller, it might subsequently be deposited back into the bank by
this person. In other words the initial deposit of money is lent out, spend and is
subsequently re-deposited by another party. This means the initial deposit of money has
created a secondary or derivative deposit of money. Each time money is lent and re-
deposited in the form of a derivative deposit a smaller and smaller amount is available for
lending.

Given an initial deposit of $100 and cash reserve ratio of 10 percent the credit creation
process can be shown by the following table. The commercial bank would lend out $90 to
a borrower then subsequently the $90 would be returned to the bank by another party in
the form of a derivative. As this is collected, 10 percent is kept as reserves at the
commercial bank and the remaining $81 is lent out. Eventually $81 would be re-
deposited into the bank and $72.90 is lent out. This process continues until the
commercial bank has no more funds available for lending.

Deposit/Money Creation by Commercial Banks
Depositor Deposits Loans Reserves
Initial Deposit 1st $100.00 $90.00 $10.00
Derivative Deposit 2nd $90.00 $81.00 $9.00
Derivative Deposit 3rd $81.00 $72.90 $8.10
Derivative Deposit 4th $72.90 $65.61 $7.29
Derivative Deposit . . .



Derivative Deposit . . .
Derivative Deposit ∞ . . .
Total Deposits $1,000.00 $900.00 $100.00

3 b i b) The total deposits would comprise of the sum of the initial deposit and all
derivative deposits. From the table this would be $100 + $90 + $81 + $72.90 + … The
table shows that this adds up to $1,000. To determine this amount the money multiplier is
used.

The money multiplier refers to ratio of the total deposits at a commercial bank to the
initial deposit and is calculated by the following formula.

Money Multiplier = 1 / (Cash Reserve Ratio)
= 1/10%
= 10
This means that if the initial deposit is $100 then total deposits created by the credit
creation process would be 10 times or $1,000.

3 b ii) Inverse relationship between the rate of interest and the demand for money.
Both the transactionary and precautionary demand for money are perfectly interest
inelastic. The inverse relationship between the rate of interest and the demand for money
arises entirely from the speculative motive. If, for some reason, the actual rate of interest
in the economy was say 5 percent but speculators anticipated that is would rise to 8
percent then individuals would prefer to hold their wealth in the form of money since as
the interest rate rises, the price of financial assets fall. This is because if wealth was held
in the form of financial assets are then a capital loss would be incurred

On the converse side, if the actual rate of interest in the economy was say 10 percent,
speculators contended that it would fall to 8 percent then individuals would hold less of
their wealth in the form of money and thus more in the form of financial assets. This is
because if the rate of interest falls, the price of financial assets would rise and the holders
of such assets would earn a capital gain.

In short, the analysis simply suggests that if the interest rate is low and expected to rise
then individuals would hold more money in speculative balances. On the other hand if the
interest rate is high and expected to fall then the speculative demand for money would be
low. This is shown in the figure which demonstrates an inverse relationship between the
rate of interest and the speculative demand for money.



The Speculation Demand for Money

IR

10

5
SB

M
$4B $10B

3 b iii) An increase in the supply of money.
As the money supply increases a surplus of money is created in the money market. In
order for the money market to clear, the rate of interest must fall to entice individuals to
hold larger money balances. As the figure shows an increase in the money supply results
in the establishment of a new equilibrium in the money market at a lower rate of interest.
This represents expansionary monetary policy as the lower interest rate would lead to an
increase in the level of output and employment in an economy.

IR
SM1 SM2

E1
IR1

E2
IR2

LP= DM

M

4 a i) National Debt and the Budget Deficit
The National Debt also known as the public sector debt is the accumulated debt built up
by the Government over a number of years that has not yet been repaid. It represents the
total amount owed by the Government to its citizens, which is domestic debt as well as
the amount owed to foreigners which is external debt.



The budget deficit refers to the difference between government spending and taxation
revenue. This short fall can be met by printing money or by borrowing. If the government
chooses to borrow, then the national debt increases.

4 a ii) Three Fiscal Measures to increase employment
1. Increased government spending on projects which create direct employment
2. Increased government spending on education
3. Decreases taxation.

4 a iii) Three Fiscal Measures to increase employment
1. Increased government spending on projects which create direct employment.
The government can increase its expenditure on projects such as infrastructure
which directly creates employment opportunities. Such expenditure would also
result in an increase in the productive capacity of the economy. Furthermore
given the multiplier effects, aggregate expenditure throughout the economy
would expand as income rises. Such increases in the demand for goods and
services would also encourage entrepreneurs to produce greater output and more
labour is employed. This means the increase in government spending also
creates indirect employment. This type of measure would be suitable in
reducing cyclical unemployment.
2. Increased government spending on education. As the government spends more
on education whether in terms of facilities or financial aid, the level of human
capital in the economy would rise. This means the productivity of labour would
be boosted and those who were previous unemployed would be able to obtain
jobs. New industries would develop and a greater proportion of the labour force
would be absorbed by employment opportunities. This type of fiscal measure
would be applicable to solving structural and technological unemployment.
3. Decreases taxation. Sometimes if direct taxation is too high it may be a major
discouragement to economic activity. A reduction in taxation would enable
workers to take home more disposable income and companies to earn greater
after tax profits. Both of these factors would increase the incentives to
productive activities and encourage more individuals to seek employment as
well as firms to hire more workers. This can be a very effective measure to
reduce cyclical unemployment as well as voluntary unemployment.

4 b i) Effect of an increase in lump sup taxes
All other variables held constant an increase in taxation which is withdrawal from the
circular flow of income would result in a fall in aggregate expenditure. As a result
national income would fall via the multiplier principle resulting in a fall in the
equilibrium level of output.

4 b ii) Effect of an Increase in Government Spending
All other variables held constant an increase in government spending which is an
injection into the circular flow if income would result in an increase in aggregate



expenditure. As such, the production would expand and national income would rise via
the multiplier principle. The end result is an increase in the equilibrium level of output.

4 b iii) Effect of an Increase in Government Spending and Lump sum taxes.
An increase in government spending and taxation of equal magnitude all other variables
held constant would affect the level of national income via the balanced budget
multiplier. This principle asserts that the equilibrium level of output would increase in
equal magnitude to the increase in government spending.

4 c) Burden of Public Debt on Future Generations
1. Recurrent vs Capital Expenditure - The money borrowed may be used for recurrent
expenditure by the government which benefits only the current populations and the
not the future generation. If however the borrowed funds is used for capital
expenditure in the form of improvements to infrastructure which last several decades
then this can benefit future generations.
2. Interest Payments - interest payments and the repayment of principal on debt reduces
the amount of money which the government has to devote towards other uses such as
spending on educational facilities for instance. This may also result in an increase in
taxes which may not be favoured by tax payers.
3. Foreign exchange drain - The repayment of interest and principal on external has to
be made using foreign currency. This causes a significant drain of foreign exchange
which negatively affects the balance of payments.

5 a i) Two Difference between Economic Growth and Development
The term "economic growth" refers to the increases in the level of national income
usually expressed in constant prices. The term "economic development," refers to a
sustainable improvement in the standard of living of a country. As such in addition to
national income economic development takes other factors into consideration. Two of
these factors are literacy rates and life expectancy.

5 a ii) Three factors which Allow Economic Growth
1. Increases in Capital Resources- investments in infrastructure such as a rapid rail
transportation network in Trinidad and Tobago.
2. Increases in Natural Resources – the discovery of new unscathed hydrocarbon
fields on the offshore territories in the Trinidad and Tobago.
3. Increases of Labour Resources – an increase in the productivity of the labour
force through expenditure on human capital formation. In Trinidad and Tobago
for instance spending on tertiary level education by the government has seen a
significant increase.

5 a iii) Two Benefits of Economic Growth
1. An Increase in Income – economic growth is defined as an increase in the level
of real national income. This is beneficial as individuals are able to consume
more goods and services which increases their standard of living.



2. Poverty reduction – economic growth also enable an increase proportion of the
labour force to be employed which also assists in reducing poverty within the
society.

5 a iii) Two Cost of Economic Growth
1. Increased inequality – as national income increases only the high income
earners may benefit while the low income earners may enjoy an improvement in
the standard of living. This means that the distribution of income might worsen
as inequality widens.
2. Negative externalities –economic growth means more output is being
production but this may be achieved at the expense of increased noise,
congestion, pollution and other negative externalities which undermine
economic welfare.

5 b i) Unequal distribution of World Income
Column 6 and 7.

5 b ii) Columns 1, columns 6 and columns 7.
Column 1 shows that there are 4 categories of countries based on GDP per capita.
Column 6 shows that the bulk of the world population resides in low income countries.
Column 7 indicates that high income countries earn 79.9 percent of world GDP.

5 b iii) Income grouping of Most CARICOM Countries
Most Caribbean countries would fall in the upper middle income category since although
many challenges are faced in the region living standards and GDP per capita is much
higher compared to the poorer countries across the world but still les than that in the
developed economies.

5 b iv) Two Consequences of low income
1. Low consumption – A low level of income means that households would not be
able to afford a lot of goods and services which they desire. If income is so low
that basic goods such as food, clothing and shelter cannot be afforded then a life
of poverty would be experienced.
2. Low savings – low income also means that households would have limited funds
available for savings. With low savings, there will not be enough funds available
for investments. Consequently, there will be less economic growth and the
country remains poor. The cycle of poverty therefore continues.

5 b v) Three Constraints to development
1. Lack of natural resources – in some developing countries natural resources may
be scare as a lot of land may be desert and non arable. Furthermore, other
natural resources such as minerals and fisheries may be non existent or
extremely limited and this places a major constraint on economic development
as basic inputs for the production process would be lacking.



2. Lack of human capital – in addition to natural resources, developing countries
may face constraints in terms of the skills possess by the workforce. Spending
on human capital formation may be minimal and the productivity of labour
would be low as a consequence. This effectively prevents such countries from
reaching efficiency levels sufficient for international competition in export
market.
3. Lack of physical capital or infrastructure – investments in infrastructure may
also be inhibited due to lack of savings to finance such expenditure. As a result
the productive capacity of such economies remains backward and the
achievement of economic development is impeded.

6 a i) Definition of the Exchange Rate
An exchange rate is simply the price at which one currency can be traded for another.
This is sometimes referred to as the external value of a country’s currency.

In 1996, the nominal exchange rate between the Trinidad and Tobago dollar and the
United States dollar was:

TT$6.00 = US$1.00 or TT$1.00 = US$0.17

6 a ii) Two Types of Exchange Rate Systems
1. Fixed Exchange Rate
2. Floating Exchange Rate

6 a iii) The Fixed Exchange Rate
The fixed exchange rate or pegged exchange rate is one means by which an exchange rate
can be determined. Under the fixed exchange rate system, the exchange rate is set by the
Government and maintained by Government intervention in the foreign exchange
markets. In Barbados for instance, a fixed exchange rate is adopted with the United States
dollar where Bds$2 = US$1.

If the official rate coincides with the equilibrium rate in the foreign exchange market,
then there is no need for Government intervention. This is shown in the figure which
presents a hypothetical illustration of the official exchange rate set by the Government of
Barbados coinciding with the rate at which the demand for foreign exchange in Barbados
is equal to its supply.



The Fixed Exchange Rate

Bds$/US$
D S

Bds$2 = US$1 Official
Rate

S D

QUS$
If, however, the official rate differs from the equilibrium rate, then Government
intervention is necessary through the manipulation of the foreign exchange reserves of
foreign currency or even foreign exchange control measures.

If at the official rate is higher then the equilibrium, then the demand for foreign exchange
would be lower then the supply of foreign exchange. Given market forces, such a surplus
would result in a decrease in the exchange rate. This however does not occur, as the rate
is fixed. Instead, the Government intervenes in the market and gets rid of the surplus by
purchasing the excess foreign exchange from the market.

In the reverse instance, where the official rate is below the market equilibrium, a shortage
is created in the foreign exchange market. Normally this would lead to upward pressure
on the exchange rate. However, since the rate is fixed, the Barbados authorities would
have to intervene in the foreign exchange market by increasing the supply of foreign
exchange. This is done by the release of foreign exchange reserves held at the Central
Bank of Barbados to the foreign exchange market.

There is however a limit on the amount of official foreign exchange reserves which a
country possesses and thus the use of reserves to defend the currency in this way cannot
be sustained indefinitely. Another solution to the shortage of foreign exchange under a
fixed rate system is the use of exchange controls. Exchange control refers to restrictions
placed upon the ability of domestic households to purchase foreign currencies which
effectively decreases the demand for foreign exchange.

6 a iii) The Floating Exchange Rate
Under the floating exchange rate system, the exchange rate between the domestic
currency and the foreign currency is determined by the demand and supply in the foreign
exchange market. The demand for foreign currency arises whenever there is need to
exchange domestic currency in return for foreign currency. The supply of foreign
currency arises from all inflows of foreign exchange in the balance of payments.



Floating Exchange Rate in Jamaica

Jam$/US$
D S

E
Jam$40 = US$1

S
D

QE QUS$

The figure shows the demand and supply for US dollars in Jamaica which has a floating
exchange rate. This shows that equilibrium in the foreign exchange market occurs at
point E, where the overall demand for US dollars is equal to the supply of US dollars. In
2000, the exchange rate in Jamaica was J$40 = US$1 which implied that the external
value of a Jamaican dollar was about US$0.025 which is about 2.5 US cents.

6 b i) An increase in price of US videos with elastic demand
As the price of US videos increases, the demand for such by the British would fall. Since
the demand is elastic there would be a decrease in the value imported videos from USA
to Britain. As a result there would be a decrease in the demand for US dollars. This is
shown in the figure.

£/US$
D1

S
D2 E1
£1.00 = US$1

£0.80 = US$1 E2
S

D2 D1

Q2 Q1 QUS$



As shown the exchange rate changes from £1.00 = US$1 to £0.80 = US$1. This means
the value of the British pound has increased relative to the US dollar.

6 b ii) An increase in price of US videos with inelastic demand
As the price of US videos increases, the demand for such by the British would fall. Since
the demand is inelastic there would be an increase in the value imported videos from
USA to Britain. As a result there would be an increase in the demand for US dollars. This
is shown in the figure.
£/US$ D2

S
D1

£1.50 = US$1 E2

£1.00 = US$1
E1
S
D2

D1

Q1 Q2 QUS$

As shown the exchange rate changes from £1.00 = US$1 to £1.50 = US$1. That is the
value of the British pound has decreased relative to the US dollar.

6 b iii) Inflation in Britain.
If there is inflation in Britain, then there would be an increase in imports from USA to
Britain which increases the demand for US dollars. In addition there would also be a
decrease in exports from Britain to USA which decreases the supply of US dollars. These
two effects are shown in the figure.

£/US$ S2
D2 S1

D1 E2
£3.00 = US$1

E1
£1.00 = US$1

S1
S2 D1 D2

Q2 Q1 QUS$



As shown the exchange rate changes from £1.00 = US$1 to £3..00 = US$1. This implies
that the value of the British pound has decreased relative to the US dollar.

6 b iv) Increase financial investments from Britain to USA
An increase in investments from Britain to USA increases the demand for US dollars.
This is shown in the figure.
£/US$ D2

S
D1

£1.50 = US$1 E2

£1.00 = US$1
E1
S
D2

D1

Q1 Q2 QUS$

As shown the exchange rate changes from £1.00 = US$1 to £1..50 = US$1. As such the
value of the British pound has decreased relative to the US dollar.


CAPE Economics, June 2004, Unit 2, Paper 2 suggested answer by Edward Bahaw

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