If the U.S. interest rate differential increases, then in the foreign exchange market the
A) quantity of U.S. dollars supplied increases.
B) supply of U.S. dollars decreases.
C) demand for U.S. dollars does not change.
D) supply of U.S. dollars increases.

Question

Quizplus · Accepted Answer

When the U.S. interest rate differential increases, foreign investors are more likely to invest in U.S. assets, leading to a decrease in the supply of U.S. dollars as fewer dollars are exchanged for foreign currencies.

If the US Interest Rate Differential Increases, Then in the Foreign Exchange