Suppose that U.S. interest rates rise relative to foreign interest rates. Within the foreign exchange market, there is a shift in the demand curve for dollars and a shift in the supply curve of dollars.

Question

Quizplus · Accepted Answer

When U.S. interest rates rise relative to foreign rates, foreign investors demand more dollars to invest in U.S. assets, shifting the demand curve for dollars rightward. Simultaneously, U.S. investors are less inclined to invest abroad, reducing the supply of dollars in the foreign exchange market, shifting the supply curve leftward.

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