An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market:
A) the demand for dollars will decrease.
B) the supply of dollars will increase.
C) the dollar will depreciate relative to foreign currencies.
D) the demand for dollars will increase.

Question

Quizplus · Accepted Answer

An increase in the real interest rate on U.S. bonds makes them more attractive to foreign investors, who will need to purchase dollars to buy these bonds, thereby increasing the demand for dollars. This increased demand strengthens the dollar relative to foreign currencies.

An Increase in the Real Interest Rate on U