If the U.S.interest rate rises relative to the foreign interest rate, then in the foreign exchange market
A) the demand for dollars increases, and the supply of dollars increases.
B) the demand for dollars increases, and the supply of dollars decreases.
C) the demand for dollars decreases, and the supply of dollars increases.
D) the demand for dollars decreases, and the supply of dollars decreases.

Question

Quizplus · Accepted Answer

When the U.S. interest rate rises relative to foreign interest rates, it becomes more attractive to hold assets denominated in dollars, increasing the demand for dollars. Conversely, Americans find foreign assets less attractive, decreasing the supply of dollars as fewer people are converting their dollars to foreign currencies.

If the USInterest Rate Rises Relative to the Foreign Interest Rate, Then