If the Federal Reserve increases interest rates
A) the demand curve for U.S. dollars shifts rightward and the supply curve of U.S. dollars shifts leftward.
B) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward.
C) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward.
D) the demand curve for U.S dollars shifts leftward and the demand curve for European euros shifts rightward.

Question

Quizplus · Accepted Answer

When the Federal Reserve increases interest rates, it makes holding U.S. dollars more attractive due to higher returns on investments denominated in dollars. This increases the demand for U.S. dollars, shifting the demand curve rightward. Simultaneously, higher interest rates can discourage borrowing in dollars, effectively reducing the supply of dollars in the foreign exchange market, shifting the supply curve leftward.

If the Federal Reserve Increases Interest Rates