Reference: Ref 20-5 (Figure: Rupee Foreign Exchange Market for Dollars) Use the figure to answer this question: Suppose war breaks out in India, and there is a great deal of political instability. Which of the scenarios would likely occur in the rupee/dollar foreign exchange market? I. The demand for U.S. dollars would shift to the right. II. The demand for U.S. dollars would shift to the left. III. The supply of U.S. dollars would shift to the right. IV. The supply of U.S. dollars would shift to the left.

Question

Quizplus · Accepted Answer

When there is war and political instability in India, investors may lose confidence in the Indian economy and seek to invest in more stable currencies like the U.S. dollar. This would lead to an increase in demand for U.S. dollars (shift to the right) and a decrease in the supply of U.S. dollars (shift to the left). Therefore, choices I and IV are correct. Choices II and III are incorrect as they imply the opposite shifts in demand and supply.