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 increase.
B) the supply of dollars will increase.
C) the dollar will depreciate relative to foreign currencies.
D) there will be a movement up the existing demand for dollars curve.

Question

Quizplus · Accepted Answer

An increase in the real interest rate on U.S. bonds will make them more attractive to foreign investors, thereby increasing the demand for dollars required to purchase these bonds. This increased demand for dollars will lead to a strengthening of the dollar on the foreign exchange market.

An Increase in the Real Interest Rate on U