Which of the following are likely to lead to an appreciation of the U.S. dollar (ceteris paribus)?
I. Higher real U.S. interest rates
II. Lower U.S. inflation
III. Higher nominal U.S. interest rates

Question

Quizplus · Accepted Answer

Higher real U.S. interest rates (I) can increase demand for the dollar, but this effect can be countered by lower inflation (II) which reduces the attractiveness of the currency. Higher nominal U.S. interest rates (III) can also increase demand for the dollar, but this effect is offset by the fact that higher interest rates usually lead to higher inflation (unless there is a strong increase in productivity) which reduces the relative value of the currency. Therefore, only choices I and II, which both contribute to a lower inflation-adjusted return on foreign assets, are likely to lead to an appreciation of the U.S. dollar (ceteris paribus).

Which of the Following Are Likely to Lead to an Appreciation