Under a system of floating exchange rates, relatively low productivity and high inflation rates in the United States result in
A) an increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar.
B) an increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar.
C) a decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar.
D) a decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar.

Question

Quizplus · Accepted Answer

High inflation rates in the United States decrease the value of the dollar relative to other currencies, resulting in an increase in the demand for foreign currency and a decrease in the supply of foreign currency. This leads to a depreciation in the dollar, which makes U.S. goods cheaper for foreigners and foreign goods more expensive for U.S. consumers. As a result, in the U.S. market for imported Toyotas, we would expect to see an increase in the quantity demanded of Toyotas as the price of Toyotas in dollars decreases due to the weak dollar.

Under a System of Floating Exchange Rates, Relatively Low Productivity