ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Demand for United States dollars and supply of euros
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Demand for both United States dollars and euros
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Supply of United States dollars and demand for euros
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Supply of both United States dollars and euros
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International value of the euro relative to the United States dollar
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Detailed explanation-1: -The answer is C. The supply curve is based off of the domestic demand for imports. As the demand for imports increases the supply of the countries currency onto the foreign exchange market increases. So the supply of currency onto the foreign exchange market is derived off of the net capital outflow.
Detailed explanation-2: -When the value of the U.S. dollar rises in relation to other currencies, exported products become more expensive in those foreign markets and are less competitive. On the other hand, imported products become less expensive in U.S. markets and are more competitive.
Detailed explanation-3: -The correct answer is choice (a) The price level in other countries increases faster than in the U.S. Faster increase in price level in foreign countries relative to those in U.S. will make U.S goods relatively cheaper than world goods and services. This will increase U.S exports thus making net exports to increase.
Detailed explanation-4: -Interest rates in the United States decrease. If interest rates decrease in the US, people would want to invest more in the EU. The supply of the dollar would increase as people would start exchanging more dollars to get euros to invest in the EU. The increased supply of the dollar would depreciate its value.