How will an interest rate decrease in the United States affect equilibrium in the foreign exchange market?
A)The equilibrium exchange rate will increase,and the equilibrium quantity of dollars traded cannot be determined.
B)The equilibrium exchange rate will decrease,and the equilibrium quantity of dollars traded cannot be determined.
C)The equilibrium exchange rate cannot be determined,and the equilibrium quantity of dollars traded will increase.
D)The equilibrium exchange rate will increase,and the equilibrium quantity of dollars traded will increase.

Question

Quizplus · Accepted Answer

When the interest rate decreases in the United States, it reduces the return on dollar-denominated assets, making them less attractive to foreign investors. As a result, there will be less demand for dollars on the foreign exchange market, causing the value of the U.S. dollar to drop. Hence, the equilibrium exchange rate will decrease, but we cannot determine the equilibrium quantity of dollars traded as it depends on other factors such as the demand for U.S. exports and the supply of foreign currencies.

How Will an Interest Rate Decrease in the United States