The United Kingdom currently has a trade deficit with New Zealand. If the U.K. pound sterling appreciates relative to the New Zealand dollar, which of the following correctly explains the effect on the U.K.'s demand for goods from New Zealand?
The U.K.'s demand for New Zealand goods will decline.
The U.K.'s demand will remain the same.
The U.K.'s demand for New Zealand goods will rise.
The U.K.'s demand for New Zealand goods can't be determined.
The correct answer is:
The U.K.'s demand for New Zealand goods will decline.
When the U.K. pound sterling appreciates relative to the New Zealand dollar, it means that the pound has strengthened in value compared to the New Zealand dollar. This makes New Zealand goods relatively more expensive for U.K. buyers. As a result, U.K. consumers and businesses are less likely to purchase goods from New Zealand because they have become relatively more expensive. Therefore, the U.K.'s demand for goods from New Zealand will decline.