As the expected future exchange rate for dollars increases,

Question

Quizplus · Accepted Answer

When the expected future exchange rate for dollars increases, it means that the value of U.S. dollars is expected to increase in the future. As a result, the demand for U.S. dollars increases because people will want to buy them now to take advantage of the expected appreciation. At the same time, the supply of U.S. dollars decreases because people will hold onto their dollars in anticipation of higher future exchange rates, reducing the amount of dollars available for immediate exchange. As for the U.S. interest rate, it may fall as a result of increased demand for U.S. dollars, but this is not a direct consequence of the expected future exchange rate.

As the Expected Future Exchange Rate for Dollars Increases