When the U.S. interest rate rises relative to that in other counties, in the foreign exchange market the demand for U.S. dollars ________ and the supply of U.S. dollars ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question

Quizplus · Accepted Answer

When the U.S. interest rate rises relative to that in other countries, it becomes more attractive to hold investments in U.S. dollars, increasing the demand for U.S. dollars as investors exchange their currency for dollars to invest in the U.S. At the same time, Americans find it more attractive to invest domestically rather than abroad, decreasing the supply of U.S. dollars on the foreign exchange market as fewer dollars are being exchanged for foreign currencies.