Depreciation of sterling boosts net exports, moderating inflation Steps:

• Note the exchange rate change: £1 falls from $1.38 to$1.32, meaning sterling depreciates.
• Depreciation makes UK exports cheaper abroad, increasing demand for UK goods.
• Higher exports raise aggregate supply without matching domestic demand surge.
• This eases price pressures, slowing the inflation rate (disinflation).

Why B is correct:

• In the AD-AS model, depreciation shifts aggregate supply rightward via export growth, reducing inflationary gaps and increasing disinflation (slowdown in inflation rate).

Why the others are wrong:

• A: Incomplete option; depreciation stimulates growth via exports, not contraction.
• C: Import costs rise, but short-term export gains dominate to curb overall inflation.
• D: Export boost actually sustains demand, not reducing demand-pull inflation.

Final answer: B