Capital Inflows and Currency Appreciation Steps:

• An increase in the UK exchange rate means the pound (£) appreciates against other currencies, driven by higher demand for £ or lower supply in forex markets.
• Assess each option's impact on £ demand (from exports or capital inflows) or supply (from imports or outflows).
• Options A and B involve trade shifts that reduce £ demand or increase its supply.
• Options C and D involve investments; only foreign inflows directly boost £ demand.

Why C is correct:

• Increased US investment in UK assets creates capital inflows, raising demand for £ to purchase those assets (per balance of payments theory, capital account surplus appreciates the currency).

Why the others are wrong:

• A: Switching to US chocolate cuts UK exports, lowering demand for £.
• B: Higher wheat imports from US increases £ supply to buy dollars.
• D: UK residents investing domestically involves no foreign exchange, leaving £ demand unchanged.

Final answer: C