The exchange rate can be very volatile, yet the quantity of dollars traded might not change much because

Question

Quizplus · Accepted Answer

The supply of dollars in the foreign exchange market is often affected by factors such as foreign investments and exports, while the demand for dollars is often affected by factors such as imports and foreign aid. As these factors often change in opposite directions, the supply and demand for dollars may shift without necessarily changing the quantity traded. Additionally, the fact that the exchange rate can be very volatile suggests that the supply and demand curves for dollars are not horizontal, so choice E can be eliminated. Choice A is also incorrect because the quantity of dollars in the foreign exchange market is determined by the actions of the Fed and other market participants, not by a fixed quantity. Choice B may be partly true, as the Fed can influence the supply and demand for dollars through its monetary policy, but it is not the only factor affecting the exchange rate. Finally, choice D is not necessarily true, as the supply and demand for dollars can move in either direction depending on the specific circumstances.

The Exchange Rate Can Be Very Volatile, Yet the Quantity