If currency traders expect the value of the dollar to rise, what effect will this have on the demand for dollars and the supply of dollars in the foreign exchange market?
A)Demand for dollars will increase and supply of dollars will decrease.
B)Demand for dollars will increase and supply of dollars will increase.
C)Demand for dollars will decrease and supply of dollars will increase.
D)Demand for dollars will decrease and supply of dollars will decrease.

Question

Quizplus · Accepted Answer

If currency traders expect the value of the dollar to rise, they will demand more dollars, leading to an increase in the demand for dollars. At the same time, the supply of dollars may decrease as traders hold onto them to take advantage of the expected appreciation. This combination of an increase in demand and a decrease in supply will result in a higher exchange rate for the dollar.

If Currency Traders Expect the Value of the Dollar to Rise