During 1980 through 1984,declining inflation and high real interest rates led to a strong demand for the U.S.dollar.Under a system of flexible exchange rates,an increase in the foreign demand for the U.S.dollar in the foreign exchange market will cause the

Question

Quizplus · Accepted Answer

Under a system of flexible exchange rates, an increase in foreign demand for a currency leads to an appreciation in its value. Hence, the increased demand for the US dollar during 1980 to 1984 would have led to an appreciation in its value. Choice A is incorrect as the dollar would not depreciate. Choice C is incorrect as there is no evident link between the foreign demand for the dollar and the US trade deficit. Choice D is incorrect as it is not clear how an increase in foreign demand for dollars would impact the US capital account deficit.

During 1980 Through 1984,declining Inflation and High Real Interest Rates