The UK experienced a growing deficit in its trade in goods during 2003 to 2007 but it also had a stable exchange rate.
What could have explained why the trade deficit failed to cause the exchange rate to change?
1 )
Investment income earned by foreigners in the UK was greater than that earned by UK residents on assets held abroad.
2 )
Speculators anticipated that the trade deficit would result in a fall in the value of the pound.
3 )
The UK’s trade in goods deficit was larger than its trade in services surplus.
The UK attracted a net inflow of foreign direct and portfolio investment.
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