Suppose that the real exchange rate is such that the market for foreign-currency exchange has a surplus
A)this will lead to an appreciation of the dollar, an increase in U.S.net exports, and so an increase in the quantity of dollars demanded in the foreign exchange market.
B)this will lead to an appreciation of the dollar, a decrease in U.S.net exports, and so a decrease in the quantity of dollars demanded in the foreign exchange market.
C)this will lead to a depreciation of the dollar, an increase in U.S.net exports, and so an increase in the quantity of dollars demanded in the foreign exchange market.
D)this will lead to a depreciation of the dollar, a decrease in U.S.net exports, and so a decrease in the quantity of dollars demanded in the foreign exchange market.

Question

Quizplus · Accepted Answer

When the market for foreign-currency exchange has a surplus, it means that there is a higher supply of foreign currency relative to the demand for it. This leads to a depreciation of the dollar, as there are more people selling foreign currencies and buying dollars. A depreciation of the dollar makes U.S. goods cheaper for foreign buyers, which leads to an increase in U.S. net exports. As a result, there will be an increase in the quantity of dollars demanded in the foreign exchange market. Therefore, option C is the correct answer.

Suppose That the Real Exchange Rate Is Such That the Market