Suppose that the U.S. exchange rate is expected to fall in the future. As a result, in the foreign exchange market, there will be
A) an increase in the demand for dollars, a decrease in the supply of dollars, and a rise in the equilibrium exchange rate.
B) an increase in the demand for dollars, a decrease in the supply of dollars, and a fall in the equilibrium exchange rate.
C) a decrease in the demand for dollars, an increase in the supply of dollars, and a rise in the equilibrium exchange rate.
D) a decrease in the demand for dollars, an increase in the supply of dollars, and a fall in the equilibrium exchange rate.

Question

Quizplus · Accepted Answer

If the U.S. exchange rate is expected to fall, investors and traders will anticipate a decrease in the value of the dollar, leading to a decrease in demand for dollars and an increase in the supply of dollars as people try to sell off their dollars before the value drops further. This results in a fall in the equilibrium exchange rate.

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