ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The correct answer is d) The inflation rate in the United States is low relative to other countries. The low inflation rate in the United States relative to other countries would increase the value of the dollar. The increase in the value of the dollar would increase its demand in the world currency market.

Detailed explanation-2: -The law of demand holds: as the price of a foreign currency increases, the quantity of that currency demanded will decrease. Foreign currencies are supplied by foreign households, firms, and governments that wish to purchase goods, services, or financial assets denominated in the domestic currency.

Detailed explanation-3: -Foreigners demand dollars in the foreign exchange market to be able to buy U.S. goods and services (U.S. exports) and U.S. real and financial assets (U.S. capital inflows).

Detailed explanation-4: -(i) when the price of a foreign currency rises, the imports become costlier and exports become cheaper so the value of imports will fall with time, hence the demand for foreign exchange will fall.