-In the figure above, suppose the economy is initially at point B. If people come to believe that the exchange rate will fall in the future, the supply of dollars ________ and the market moves to point such as ________.
A) decreases; A
B) decreases; E
C) increases; D
D) increases; C

Question

-In the figure above, suppose the economy is initially at point B. If people come to believe that the exchange rate will fall in the future, the supply of dollars ________ and the market moves to point such as ________.
A) decreases; A 
B) decreases; E 
C) increases; D 
D) increases; C

Quizplus · Accepted Answer

If people believe that the exchange rate will fall in the future, they are likely to exchange their dollars for foreign currency now, before the value of the dollar decreases. This increases the supply of dollars in the foreign exchange market, moving the market to a point such as C, where the supply of dollars has increased.

-In the Figure Above, Suppose the Economy Is Initially at Point