In the foreign exchange market, pounds per dollar is on the y-axis and quantity of dollars is on the x-axis. If the interest rate in the United States rises above the rate in the United Kingdom at the same time that U.S. consumers want more British goods, then _____ if the interest rate effect is larger.

Question

Quizplus · Accepted Answer

If the interest rate in the U.S. rises above that in the U.K., it attracts more foreign capital, increasing demand for dollars and causing the dollar to appreciate. If U.S. consumers want more British goods, they need more pounds, increasing demand for pounds. However, if the interest rate effect is larger, the appreciation of the dollar will outweigh the demand for pounds, leading to the depreciation of the pound.

In the Foreign Exchange Market, Pounds Per Dollar Is on the Y-Axis