A decrease in the United States interest rate relative to the Japanese interest rate will cause the exchange rate, measured in yen per dollar, to ____ as international investors ____ their demand for dollar-denominated assets.
A)rise; increase
B)fall; increase
C)rise; decrease
D)None of these are correct because only the government can change the exchange rate.
E)fall; decrease

Question

Quizplus · Accepted Answer

When US interest rates decrease relative to Japanese interest rates, international investors will demand fewer dollar-denominated assets, causing the supply of dollars to increase relative to yen. This increased supply of dollars will lead to a decrease in the exchange rate, measured in yen per dollar. Therefore, the correct choice is E: fall; decrease.

A Decrease in the United States Interest Rate Relative to the Japanese