An article in the New York Times discusses the consequences in financial markets of Brexit, the vote in a 2016 referendum in the United Kingdom to leave the European Union: “Investors have dumped much that seems risky—the pound, the euro and shares on stock exchanges around the world. They have entrusted the proceeds to that rare sure thing, United States Treasury bills.” The article described this process as a “flight to safety.”
a. What is a “flight to safety”?
b. How would the flight to safety affect the exchange rate between the pound and the U.S. dollar? Illustrate your answer with a demand and supply graph showing the market for U.S. dollars in exchange for British pounds.