If the U.S. interest rate differential increases, in the foreign exchange market the demand for U.S. dollars __________and the supply of U.S. dollars __________.
A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases

Question

Quizplus · Accepted Answer

An increasing interest rate differential means that the U.S. interest rate is higher relative to other currencies. This makes U.S. financial assets more attractive, increasing the demand for dollars (since investors need to convert their currency to dollars to invest in U.S. assets). At the same time, the supply of dollars decreases since U.S. investors find foreign assets less attractive and fewer dollars are being sold to buy those assets.

If the US Interest Rate Differential Increases, in the Foreign Exchange Market