Between 1998 and the end of 2000, the U.S. ran a large trade deficit; this should have caused the dollar to depreciate against foreign currencies but instead the dollar appreciated. The main reason for this is:
A) foreign exchange markets are slow to react.
B) the supply of dollars actually fell.
C) the dramatic increase in U.S. stock prices attracted a lot of foreign capital increasing the demand for dollars by more than the increase in the supply of dollars.
D) the demand for dollars shifted left by more than the supply of dollars shifted right.

Question

Quizplus · Accepted Answer

The dramatic increase in U.S. stock prices attracted a lot of foreign capital increasing the demand for dollars by more than the increase in the supply of dollars. This increased demand for dollars caused the dollar to appreciate despite the trade deficit, as more foreign investors were seeking to invest in U.S. markets.

Between 1998 and the End of 2000, the U