The law of demand in the foreign exchange market refers to the relationship between the
A) exchange rate and the quantity of U.S. dollars demanded.
B) interest rate and the exchange rate.
C) interest rate and the quantity of U.S. dollars demanded.
D) U.S. price level and the exchange rate.

Question

Quizplus · Accepted Answer

The law of demand states that as the price of a good or service increases, the quantity demanded decreases. In the foreign exchange market, this means that as the exchange rate (price of a currency) increases (i.e. it takes more U.S. dollars to buy a foreign currency), the quantity of U.S. dollars demanded decreases. This is because foreign goods become more expensive for U.S. buyers when the exchange rate increases, leading to a decrease in demand for foreign goods and therefore a decrease in demand for foreign currency.

The Law of Demand in the Foreign Exchange Market Refers