A change in U.S. interest rates relative to foreign interest rates may be graphically represented as which of the following?
A)a movement upward on the supply curve of dollars in the foreign exchange market
B)a movement upward or downward on the supply curve of dollars in the foreign exchange market
C)a rightward shift of the revenue curve in the foreign exchange market
D)a shift of the demand or supply curve of dollars in the foreign exchange market

Question

Quizplus · Accepted Answer

A change in U.S. interest rates relative to foreign interest rates will cause a shift in the demand or supply curve of dollars in the foreign exchange market. If U.S. interest rates increase, then the demand for dollars will increase as investors seek higher returns on their investments. This will cause a shift in the demand curve for dollars to the right. Alternatively, if foreign interest rates increase, then the supply of dollars will increase as investors sell their dollar-denominated assets and invest in higher-yielding foreign assets. This will cause a shift in the supply curve for dollars to the right. Therefore, the correct answer is D.

A Change in U