If the Federal Reserve increases interest rates, ceteris paribus,
A) only the demand curve for U.S. dollars shifts rightward.
B) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward.
C) the supply curve of U.S. dollars shifts leftward and the supply curve of European euros shifts rightward.
D) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward.

Question

Quizplus · Accepted Answer

When the Federal Reserve increases interest rates, U.S. assets become more attractive, increasing demand for U.S. dollars and decreasing their supply as fewer dollars are exchanged for foreign currencies. This leads to a leftward shift in the supply curve of U.S. dollars and a rightward shift in the supply curve of European euros as more euros are exchanged for dollars.

If the Federal Reserve Increases Interest Rates, Ceteris Paribus