The expected future exchange rate has ________ on the supply of dollars and has ________ on the demand for dollars.

Question

Quizplus · Accepted Answer

The expected future exchange rate affects both the supply and demand for dollars. If the expected future exchange rate is favorable (i.e. the dollar is expected to appreciate), then there will be an increase in the supply of dollars as investors want to hold onto dollars in anticipation of the appreciation. At the same time, there will be a decrease in the demand for dollars as foreign investors are less likely to want to hold dollars, given the expectation of future appreciation. On the other hand, if the expected future exchange rate is unfavorable (i.e. the dollar is expected to depreciate), then there will be a decrease in the supply of dollars as investors try to minimize their exposure to the potential depreciation. At the same time, there will be an increase in the demand for dollars as foreign investors seek to hold dollars, given the expectation of future depreciation.

The Expected Future Exchange Rate Has ________ on the Supply