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Exchange Rates: Shifts in Supply and Demand quiz

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  • What happens to the demand for US dollars when foreign income increases?
    The demand for US dollars increases because foreigners have more income to spend on US goods, shifting the demand curve to the right.
  • How does a rise in US interest rates affect the demand for US dollars?
    A rise in US interest rates increases demand for US dollars as investors seek higher returns, causing the demand curve to shift right.
  • What is the effect on the exchange rate when demand for US dollars increases?
    The exchange rate rises, meaning the US dollar appreciates and can buy more foreign currency.
  • How does a decrease in foreign income affect the demand for US dollars?
    A decrease in foreign income reduces demand for US dollars, shifting the demand curve to the left and causing the dollar to depreciate.
  • What role do speculative expectations play in the demand for US dollars?
    If speculators expect the US dollar to appreciate, demand for US dollars increases as people want to hold dollars before they rise in value.
  • What happens to the exchange rate when demand for US dollars decreases?
    The exchange rate falls, meaning the US dollar depreciates and buys less foreign currency.
  • How does an increase in US income affect the supply of US dollars?
    An increase in US income leads to more imports, increasing the supply of US dollars in the foreign exchange market.
  • What is the effect of higher foreign interest rates on the supply of US dollars?
    Higher foreign interest rates increase the supply of US dollars as Americans exchange dollars to invest abroad.
  • How do expectations of US dollar depreciation affect the supply of US dollars?
    If people expect the US dollar to depreciate, they supply more dollars now to buy foreign assets before the dollar loses value.
  • What happens to the exchange rate when the supply of US dollars increases?
    The exchange rate decreases, meaning the US dollar depreciates and buys less foreign currency.
  • How does a decrease in US income affect the supply of US dollars?
    A decrease in US income reduces imports, decreasing the supply of US dollars in the foreign exchange market.
  • What is the effect on the exchange rate when the supply of US dollars decreases?
    The exchange rate rises, meaning the US dollar appreciates and can buy more foreign currency.
  • Which three main determinants cause shifts in the demand and supply of US dollars?
    The main determinants are changes in income, interest rates, and speculative expectations.
  • How do shifts in the exchange rate market affect international trade?
    Shifts in exchange rates change the relative price of currencies, impacting the cost of imports and exports and thus the trade balance.
  • Why is understanding shifts in supply and demand for currency important in macroeconomics?
    It helps analyze currency fluctuations, their effects on aggregate demand, and the global economic equilibrium.