Suppose that the U.S. exchange rate is expected to fall in the future. As a result, in the foreign exchange market, there will be
A) an increase in the demand for dollars, a decrease in the supply of dollars, and a rise in the equilibrium exchange rate.
B) a decrease in the demand for dollars, an increase in the supply of dollars, and a fall in the equilibrium exchange rate.
C) a decrease in the demand for dollars, an increase in the supply of dollars, and a rise in the equilibrium exchange rate.
D) an increase in the demand for dollars, a decrease in the supply of dollars, and a fall in the equilibrium exchange rate.

Question

Quizplus · Accepted Answer

If the U.S. exchange rate is expected to fall in the future, then investors will want to hold fewer dollars in anticipation of a weakening currency. This leads to a decrease in demand for dollars and an increase in the supply of dollars in the foreign exchange market. The increase in supply relative to demand will cause the equilibrium exchange rate to fall. Therefore, option B is the correct answer.

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