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 rate of inflation in the United States is higher than the rate of inflation in Switzerland,the demand for francs decreases,the supply of francs increases,and the dollar's exchange value appreciates.

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 rate of inflation in the United States is higher than the rate of inflation in Switzerland,the demand for francs decreases,the supply of francs increases,and the dollar's exchange value appreciates.

Quizplus · Accepted Answer

If the rate of inflation in the United States is higher than the rate of inflation in Switzerland, the demand for francs is expected to decrease, but the supply of francs is not necessarily expected to increase. In fact, the supply of francs could decrease if Swiss investors prefer to hold onto their franc-denominated assets during times of higher inflation in the US. The dollar's exchange value would also not necessarily appreciate in this scenario. The exchange rate will depend on the relative changes in supply and demand for both currencies.

The Figure Below Illustrates the Supply and Demand Schedules of Swiss