Question

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?
The trade deficit will increase, 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 decrease, 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.

Answer 1

The correct answer to the given question is that the trade deficit would increase since with the appreciating pound means more goods will be imported from New Zealand.

Based on the given question, we are asked to show the effects of the trade deficit between New Zealand and UK based on the appreciation of the pound sterling relative to the New Zealand dollar.

With this in mind, we are aware that when there is a strong domestic currency, then it would encourage more imports and hamper exports, therefore, the trade deficit will increase, since an appreciating pound means more goods will be imported from New Zealand.

Therefore, the correct answer is option D

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