Other things remaining the same, the _________the exchange rate for dollars, the greater the_________ in the foreign exchange market.
A) higher; quantity of dollars demanded
B) higher; expected profits from holding dollars
C) higher; quantity of dollars supplied
D) lower; value of U.S. imports

Question

Quizplus · Accepted Answer

According to the law of demand, if the price of a good (in this case, the price is the exchange rate) increases, the quantity demanded of that good (in this case, the quantity demanded of dollars in the foreign exchange market) decreases. Therefore, the higher the exchange rate for dollars (the price of dollars relative to other currencies), the lower the quantity of dollars demanded in the foreign exchange market. Choice A is incorrect because it suggests that the higher the exchange rate, the more dollars will be demanded, which is not consistent with the law of demand. Choice B is incorrect because it is not necessarily true that higher exchange rates will lead to higher expected profits for holding dollars (it depends on other factors such as interest rates). Choice D is incorrect because the question is asking about the impact on the foreign exchange market as a whole, not just on U.S. imports.

Other Things Remaining the Same, the _________The Exchange Rate for Dollars