If foreigners decide to increase their investments in the U.S., this will cause
A) an appreciation of the dollar and foreign goods to become cheaper
B) a depreciation of the dollar and U.S. goods to become cheaper
C) a favorable balance of trade and an appreciation of the dollar
D) balance of payments still nets out to zero
E) a surplus in the current account

Question

Quizplus · Accepted Answer

When foreigners increase their investments in the U.S., demand for the dollar rises as they convert their currency into dollars to make investments. This increased demand for the dollar leads to its appreciation. As the dollar strengthens, foreign goods become cheaper for U.S. consumers, since they now need fewer dollars to buy the same amount of foreign currency to purchase goods.

If Foreigners Decide to Increase Their Investments in the U