Chapter 42, Problem 7MCQ

To determine

The correct option if demand for the US dollar is decreased in the foreign exchange market.

Answer to Problem 7MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b

A worldwide recession would cause a fall in the demand for country U dollars as there is no or less demand for goods and services, thereby leading to a fall in the overall demand for currency. Therefore, option b is correct.

Explanation for incorrect options:

a.

Decrease in relative price would increase the demand for dollars in the country U.

c.

Increase in foreign visits to the country U would increase the demand for dollars. d.

Increase in the relative interest rate in the country U would increase the demand for dollars. e.

Increase in the real GDP of the country U will increase the demand for the country U.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.