The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates.
Figure 12.2.The Market for Swiss Francs

-Refer to Figure 12.2.If the Federal Reserve adopts a restrictive monetary policy that leads to relatively high interest rates in the United States,the demand for francs would decrease,the supply of francs would increase,and the dollar's exchange value would appreciate.

Question

The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates.
Figure 12.2.The Market for Swiss Francs
 
-Refer to Figure 12.2.If the Federal Reserve adopts a restrictive monetary policy that leads to relatively high interest rates in the United States,the demand for francs would decrease,the supply of francs would increase,and the dollar's exchange value would appreciate.

Quizplus · Accepted Answer

When the Federal Reserve adopts a restrictive monetary policy that leads to relatively high interest rates in the United States, it encourages investors to hold onto their dollars rather than investing in foreign currencies. This decreases the demand for foreign currencies, such as the Swiss franc, and increases the supply of those currencies. As a result, the exchange value of the dollar appreciates, meaning that it can buy more units of the Swiss franc than before.

The Figure Below Illustrates the Supply and Demand Schedules of Swiss