Under a system of floating exchange rates, relatively high productivity and low 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

Under a floating exchange rate system, a country with high productivity and low inflation rates will have a relatively strong currency, as there is higher demand for its currency due to the strength of its domestic economy. This, in turn, leads to a decrease in the demand for foreign currency, as individuals and businesses in the US are relatively less inclined to exchange their US dollars for foreign currencies. At the same time, there is an increase in the supply of foreign currencies in the US market, as individuals and businesses in other countries are keen to exchange their currencies for US dollars, which are seen as relatively stable and valuable. This increased supply of foreign currencies, coupled with decreased demand for them, leads to an appreciation in the value of the US dollar. Therefore, option D is the best choice.

Under a System of Floating Exchange Rates, Relatively High Productivity