In the foreign exchange market, pounds per dollar is on the y axis and quantity of dollars is on the x axis. If the interest rate in the United States rises above the rate in the United Kingdom at the same time that U.S. consumers want more British goods, then the dollar will _____, and the pound will _____ if the interest rate effect is larger.

Question

Quizplus · Accepted Answer

When the interest rate in the United States rises above that in the United Kingdom, it makes holding dollars more attractive, leading to an appreciation of the dollar. If the interest rate effect is larger than the effect of increased demand for British goods (which would normally lead to a depreciation of the dollar and an appreciation of the pound), the net effect is that the dollar appreciates and the pound depreciates.

In the Foreign Exchange Market, Pounds Per Dollar Is on the Y