If the Federal Reserve increases U.S. interest rates
A) the demand curve for U.S. dollars shifts rightward and the supply curve of U.S. dollars shifts leftward.
B) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward.
C) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward.
D) the demand curve for U.S dollars shifts leftward and the demand curve for European euros shifts rightward.

Question

Quizplus · Accepted Answer

When the Federal Reserve increases U.S. interest rates, it makes holding U.S. dollars more attractive due to higher returns on investments denominated in dollars. This increases the demand for U.S. dollars, shifting the demand curve rightward. Simultaneously, the higher interest rates make Americans less inclined to invest abroad, reducing the supply of U.S. dollars on the foreign exchange market, hence shifting the supply curve leftward.

If the Federal Reserve Increases U.S. Interest Rates