With a system of flexible exchange rates,an increase in demand for a country's currency will cause:
A)a temporary excess supply of the currency
B)a temporary excess demand of the currency
C)a drop in the value of the country's currency
D)an ongoing balance of payments deficit
E)an ongoing balance of payments surplus

Question

Quizplus · Accepted Answer

An increase in demand for a country's currency will lead to a temporary excess demand for the currency. This is because the quantity of the currency demanded will be greater than the quantity of the currency supplied at the original exchange rate. As a result, the value of the currency will appreciate and its exchange rate will increase to restore equilibrium in the foreign exchange market. Eventually, the excess demand for the currency will be eliminated as the exchange rate adjusts.

With a System of Flexible Exchange Rates,an Increase in Demand