-Refer to Figure 12.1. In terms of the diagram an increase in US interest rates would: A) shift D₀ out and S₀ in, causing a rise in the exchange rate. B) shift D₀ out and S₀ out, causing a fall in the exchange rate. C) shift D₀ in and S₀ in, leaving the exchange rate unchanged. D) shift D₀ in and S₀ out, having no effect on the exchange rate.

Question

Quizplus · Accepted Answer

An increase in US interest rates makes US financial assets more attractive, leading to an increased demand for dollars (shifting the demand curve out) and a decreased supply of dollars (as investors hold onto their dollars to invest in the US, shifting the supply curve in), causing the exchange rate to rise.