Holding all else constant, higher interest rates in the United States would
A) decrease the demand for U.S. dollars in the foreign exchange market. In turn, this will lead to a decrease in the exchange rate, and subsequently, U.S. net exports would rise.
B) increase the demand for U.S. dollars in the foreign exchange market. In turn, this will lead to an increase in the exchange rate, and subsequently, U.S. net exports would fall.
C) increase the demand for U.S. dollars in the foreign exchange market. In turn, this will lead to a decrease in the exchange rate, and subsequently, U.S. net exports would rise.
D) decrease the demand for U.S. dollars in the foreign exchange market. In turn, this will lead to an increase in the exchange rate, and subsequently, U.S. net exports would fall.

Question

Quizplus · Accepted Answer

Higher interest rates in the U.S. attract foreign capital, increasing the demand for U.S. dollars. This appreciation of the dollar raises the exchange rate, making U.S. goods more expensive abroad, thus reducing net exports.

Holding All Else Constant, Higher Interest Rates in the United