With a floating exchange rate,an increase in the U.S.interest rate will cause:

Question

Quizplus · Accepted Answer

When the U.S. interest rate increases, it makes U.S. assets more attractive to foreign investors, causing capital to flow into the United States. This increased demand for dollars leads to an increase in the value of the dollar relative to other currencies, that is, an appreciation of the dollar. Thus, both capital flow and an increase in demand for dollars lead to an appreciation of the dollar. Therefore, the correct choice is D, which includes both capital inflows, an increase in the demand for dollars and an appreciation of the dollar.

With a Floating Exchange Rate,an Increase in the U