With everything else the same, in the foreign exchange market which of the following increases the of U.S. dollars?
I. a fall in the U.S. interest rate
II. a fall in interest rates in foreign countries
III. a rise in expected future exchange rate

Question

Quizplus · Accepted Answer

A fall in the U.S. interest rate makes holding dollars less attractive, leading to a decrease in demand for dollars and a decrease in its value. A fall in interest rates in foreign countries will make their currencies less attractive, leading to an increase in demand for dollars and an increase in its value. A rise in expected future exchange rate means that in the future, dollars will be worth more in other currencies, leading investors to demand more dollars now and increasing its value. However, only option I increases the supply of dollars in the market, leading to a decrease in its value. Therefore, only option I (a fall in the U.S. interest rate) increases the value of U.S. dollars.

With Everything Else the Same, in the Foreign Exchange Market