Equilibrium in Floating Forex Market

Steps:

• Identify demand curve for £ as downward-sloping, reflecting higher $ price for more £.
• Identify supply curve for £ as upward-sloping, from UK exporters supplying £ for $.
• Equilibrium occurs where demand equals supply, setting exchange rate E and quantity Q.
• Shifts in curves (e.g., UK inflation) change E, but floating market self-adjusts without intervention.

Why C is correct:

• C matches the definition of floating exchange rates, where market forces alone determine the £/$ rate at supply-demand intersection, per international trade theory.

Why the others are wrong:

• A incorrectly assumes fixed rates set by central banks.
• B misapplies supply-demand to domestic goods, not currency.
• D confuses with managed floats involving government intervention.

Not enough information on diagram specifics.

Final answer: C