A UK business imports raw materials from the USA. The exchange rate changes from £1 = $1.50 to £1 = $1.20. What is the effect on the UK business?

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Question

A UK business imports raw materials from the USA. The exchange rate changes from £1 = $1.50 to £1 = $1.20. What is the effect on the UK business?

Accepted Answer

Importing becomes more expensive as the pound has weakened — The pound has weakened (depreciated) because it now buys fewer dollars ($1.20 instead of $1.50). This means the UK business must spend more pounds to buy the same dollar-priced raw materials, making imports more expensive. Options A and D incorrectly describe the direction of the exchange rate change.

Answer

Importing becomes cheaper as the pound has strengthened

Answer

Importing becomes cheaper as the pound has weakened

Answer

Importing becomes more expensive as the pound has weakened

Answer

Importing becomes more expensive as the pound has strengthened

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