How will an interest rate increase in the United States affect equilibrium in the market for dollars against foreign currencies? (Assume the exchange rate is stated in terms of foreign currency per U.S.dollar.)
A)The equilibrium exchange rate will increase,and the equilibrium quantity of dollars traded cannot be determined.
B)The equilibrium exchange rate will decrease,and the equilibrium quantity of dollars traded cannot be determined.
C)The equilibrium exchange rate cannot be determined,and the equilibrium quantity of dollars traded will increase.
D)The equilibrium exchange rate will increase,and the equilibrium quantity of dollars traded will increase.

Question

Quizplus · Accepted Answer

An increase in interest rates in the United States will lead to an increase in the demand for dollars as foreign investors seek higher returns on their investments. This increase in demand will cause the equilibrium exchange rate to increase. However, the effect on the equilibrium quantity of dollars traded cannot be determined since it will depend on the extent of the increase in demand for dollars and the supply of dollars in the market.

How Will an Interest Rate Increase in the United States