If the Fed hikes the U.S. interest rate relative to interest rates in other countries, in the foreign exchange market the demand for dollars will________ , the supply of dollars will ________, and the exchange rate will________ .
A) increase; increase; rise
B) increase; decrease; rise
C) decrease; decrease; fall
D) decrease; increase; fall

Question

Quizplus · Accepted Answer

If the Fed hikes the U.S. interest rate relative to interest rates in other countries, it will increase the demand for dollars as investors will seek higher returns. This will lead to an increase in the value of the dollar and the exchange rate. However, it will also decrease the supply of dollars as investors are less willing to sell their dollars for other currencies. Therefore, the most accurate choice is B, which states that the demand for dollars will increase, the supply of dollars will decrease, and the exchange rate will rise.

If the Fed Hikes the U