Currency traders expect the dollar to appreciate.What impact will this have on equilibrium in the foreign exchange market?
A)The dollar will appreciate, and the equilibrium quantity of dollars will decrease.
B)The dollar will depreciate, and the equilibrium quantity of dollars exchanged will decrease.
C)The dollar will appreciate, and the equilibrium quantity of dollars will increase.
D)The dollar will appreciate, and the change in the equilibrium quantity of dollars exchanged cannot be determined.
E)The dollar will depreciate, and the change in the equilibrium quantity of dollars exchange cannot be determined.

Question

Quizplus · Accepted Answer

When currency traders expect the dollar to appreciate, demand for dollars increases as investors seek to benefit from the appreciation. This leads to an appreciation of the dollar. However, the impact on the equilibrium quantity of dollars exchanged depends on the shifts in both demand and supply in the foreign exchange market, which cannot be determined from the expectation alone.

Currency Traders Expect the Dollar to Appreciate