Figure 11-4 -Refer to Figure 11-4. In Panel (b), assume that the price of bonds rises from P₁ to P₂. Now, in Panel (c), the higher price of bonds will A) reduce the demand for and increase the supply of dollars and cause the exchange rate to increase. B) reduce the demand for and increase the supply of dollars and cause the exchange rate to rise. C) increase the demand for and reduce the supply of dollars and cause the exchange rate to increase. D) reduce the demand for and increase the supply of dollars and cause the exchange rate to fall.

Question

Quizplus · Accepted Answer

According to the diagram, the rise in bond prices leads to an increase in the interest rate, which reduces the demand for dollars and increases the supply of dollars. Therefore, the exchange rate will fall.

Figure 11-4 -Refer to Figure 11-4. in Panel (B), Assume That the Assume