With everything else the same, in the foreign exchange market the
A) the lower the exchange rate, the smaller is the expected profit from buying dollars.
B) the higher the exchange rate, the cheaper are U.S.-produced goods and services.
C) larger the value of U.S. exports, the greater is the quantity of dollars demanded.
D) lower the exchange rate, the smaller the amount of U.S. exports.

Question

Quizplus · Accepted Answer

According to the law of demand, as the price of a good decreases, the quantity demanded of that good increases. Similarly, as the exchange rate (price of a currency) decreases, the quantity demanded of that currency (in this case, dollars) increases. When the value of U.S. exports is larger, there is a greater amount of demand for dollars, which in turn pushes up the exchange rate. Therefore, option C is correct. Option A is incorrect because a lower exchange rate provides a cheaper price for buying dollars, leading to a larger expected profit. Option B is incorrect because a higher exchange rate makes U.S.-produced goods and services more expensive for foreign buyers. Option D is incorrect because a lower exchange rate makes U.S. exports (priced in dollars) cheaper for foreign buyers, leading to a larger demand for U.S. products.

With Everything Else the Same, in the Foreign Exchange Market