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 rise.
• The U.K.'s demand for New Zealand goods can't be determined.
• The U.K.'s demand will remain the same.
• The U.K.'s demand for New Zealand goods will decline.
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 U.K. currency has increased in value compared to the New Zealand currency. As a result, it becomes more expensive for the U.K. to import goods from New Zealand. This increase in price makes the goods from New Zealand relatively less affordable, leading to a decrease in demand for these goods.