Which of the following would likely cause the dollar to appreciate? a) Rising in
ID: 1167338 • Letter: W
Question
Which of the following would likely cause the dollar to appreciate?
a) Rising interest rates in the United States.
b) An increase in United States citizens' preference for foreign goods.
c) Income growth of the United States exceeding that of other countries.
d) Rising inflation in the United States.
Which of the following would likely cause the dollar to appreciate?
a) Lower interest rates in the United States.
b) An increase in United States citizens' preference for foreign goods.
c) Income growth of the United States lagging behind that of other countries.
d) Rising inflation in the United States.
Which of the following would likely cause the dollar to depreciate?
a) Rising interest rates in the United States.
b) An increase in United State citizens' preference for foreign goods.
c) Income growth of the United States lagging behind that of other countries.
d) Lower inflation in the United States.
In order to maintain a fixed exchange rate when demand for a domestic currency falls, the government must:
a) use its foreign currency reserves to buy domestic currency.
b) use domestic currency to buy more foreign currency.
c) print more money to boost the money supply.
d) reduce interest rates to attract more demand for domestic currency.
Explanation / Answer
1. Rising interest rates in the USA will cause the dollar to appreciate. When interest rates increase, this will attract foreign investors towards the country because foreigners will get high rate of return on their investment. In order to invest in USA, foreigners will buy USD in forex market and that will increase the demand for USD, which will cause appreciation of USD.
All the other 3 options mentioned in the question causes domestic currency depreciation.
Answer-option A
2. Income growth of USA lagging behind that of other countries will cause USA to decrease their demand for imports, thereby decreasing the capital outflow. However, as export is higher than import i.e. capital inflow is higher than capital outflow, therefore value of USD will increase.
Answer-option C
3. An increase in US citizens' preference for foreign goods will increase demand for import, thereby increasing capital outflow. An increase in capital outflow will decline the value of USD.
Answer- option B
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