Suppose that interest rates rise in the United States. We expect capital _____ to/from the United States and the U.S. dollar price of foreign currencies to _____, all other things equal.

Question

Quizplus · Accepted Answer

When interest rates rise in the United States, it becomes more attractive for investors to hold assets denominated in U.S. dollars, leading to capital inflows. As demand for the U.S. dollar increases to purchase these assets, the U.S. dollar appreciates, making foreign currencies cheaper in terms of dollars, hence the U.S. dollar price of foreign currencies falls.

Suppose That Interest Rates Rise in the United States