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A-Level Economics · Currency depreciation diagram question

A cut in UK interest rates moves the supply of pounds from S₁ to S₂. What is actually happening in the market to push it right?

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The answer

UK savers move their money abroad to chase better rates — they SELL pounds, and that selling is the hot money outflow. The step most students skip: for supply to shift, somebody must actually be SELLING the pound. Rate cut → savers move money out → they sell sterling → S₁ to S₂. You can't just assert that supply shifts. Fill in every link: UK rates fall → savers think 'I'm only getting 1% here' → to save in New York or Paris they must SELL pounds and buy dollars or euros → that hot money outflow IS the extra supply, S₁ to S₂ → new equilibrium at F, a weaker pound. Quantitative easing does the same job by raising the money supply.

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This is one of 5 questions on the currency depreciation diagram — every corner lettered, every wrong answer diagnosed.

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