If the U.S. Federal reserve bank is using policy to combat inflation, what is likely to happen in the foreign exchange market and to the foreign exchange value of the dollar?
A) The demand for the dollar will increase and the foreign exchange value of the dollar will rise.
B) The demand for the dollar will decrease and the foreign exchange value of the dollar will rise.
C) The demand for the dollar will decrease and the foreign exchange value of the dollar will fall.
D) The demand for the dollar will increase and the foreign exchange value of the dollar will fall.

Question

Quizplus · Accepted Answer

When the U.S. Federal Reserve combats inflation, typically by raising interest rates, it makes dollar-denominated assets more attractive to investors, increasing the demand for the dollar and thus its value in the foreign exchange market.

If the US Federal Reserve Bank Is Using Policy to Combat Inflation