Use the following data to work this problem. On March, 02, 2016, the U.S. dollar

Question

Use the following data to work this problem. On March, 02, 2016, the U.S. dollar was trading at 114 yen per U.S. dollar on the foreign exchange market. On May, 27, 2016, the U.S. dollar was trading at 110 yen per U.S. dollar. Real time data provided by Federal Reserve Economic Data (FRED). Federal Reserve Bank of Saint Louis Click here to see the data in FRED, a. What events in the foreign exchange market could have brought this fall in the value of the U.S. dollar? Answer by typing Y for "Yes" or N for "No". Word demand for U.S. exports decreases. Word demand for U.S. export increases. U.S. import demand decreases. U.S. import demand increases. The U.S. interest rate differential falls. The U.S. interest rate differential rises. The expected future exchange rate falls. The expected future exchange rate rises.

Explanation / Answer

In the given scenario, the value of US dollar depreciates. This is caused when consumers use U.S. dollars to buy the foreign currency. This will cause the demand for foreign currency to increases, thereby proportionately increasing the supply of U.S. dollars. As the supply of dollars increases, the “price” of U.S. dollars falls, causing the dollar to depreciate (fall in value).

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