The higher the exchange rate today, the
A) greater the quantity of U.S. dollars demanded in the foreign exchange market today.
B) greater is the expected profit from buying U.S. dollars today and holding them.
C) smaller is the expected profit from buying U.S. dollars today and holding them.
D) smaller is the expected profit from buying foreign currency today and holding it.

Question

Quizplus · Accepted Answer

When the exchange rate is higher, it means that it takes more units of foreign currency to buy one unit of U.S. currency. This means that it is less profitable to buy U.S. dollars today and hold them, as they will likely be worth less in the future when the exchange rate goes down. Therefore, the expected profit from buying U.S. dollars today and holding them is smaller when the exchange rate is higher.

The Higher the Exchange Rate Today, the