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A-Level Economics · Currency appreciation (hot money) diagram question

The pound has appreciated from e₁ to e₂. What happens to UK IMPORTS?

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The answer

Import prices fall in pounds, so under elastic demand expenditure on imports rises — M goes up. Stronger pound → each pound buys more dollars → imports cheaper at home → under any elastic response, spending on imports rises. An appreciation lowers the price of imports in pounds. If demand for imports is elastic, the quantity bought rises proportionately more than the price falls, so total import expenditure RISES. Combine that with falling export revenue and you get the classic appreciation-driven trade deficit.

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