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 trade deficit?(1 point)

Question

Responses

The trade deficit will decrease, since an appreciating pound means fewer goods will be imported from New Zealand.
The trade deficit will decrease, since an appreciating pound means fewer goods will be imported from New Zealand.

The trade deficit will increase, since an appreciating pound means more goods will be imported from New Zealand.
The trade deficit will increase, since an appreciating pound means more goods will be imported from New Zealand.

The trade deficit will decrease, since an appreciating pound means more goods will be imported from New Zealand.
The trade deficit will decrease, since an appreciating pound means more goods will be imported from New Zealand.

The trade deficit will increase, since an appreciating pound means fewer goods will be imported from New Zealand.

Answer 1

The correct response is:

The trade deficit will decrease, since an appreciating pound means fewer goods will be imported from New Zealand.

When the pound sterling appreciates relative to the New Zealand dollar, UK consumers and businesses find imports from New Zealand cheaper, which may initially suggest that imports could increase. However, since the UK already has a trade deficit with New Zealand, a stronger pound makes New Zealand goods relatively more expensive for UK consumers when viewed in GBP. This could lead to a decrease in the quantity of New Zealand imports, thereby potentially reducing the trade deficit.