If the U.S. interest rate differential increases, in the foreign exchange market the demand for U.S. dollars ________ and the supply of U.S. dollars ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question

Quizplus · Accepted Answer

When the U.S. interest rate differential increases, it means U.S. interest rates are higher relative to other countries. This makes U.S. investments more attractive, increasing the demand for U.S. dollars as foreign investors need dollars to invest. At the same time, higher interest rates make borrowing in dollars more expensive, and U.S. investors are less likely to invest abroad, decreasing the supply of U.S. dollars in the foreign exchange market.

If the US Interest Rate Differential Increases, in the Foreign Exchange Market