Chapter 8R, Problem 21MCQ

To determine

The correct option that explains the reason for the movement of demand of the US dollar from D1 to D2.

Answer to Problem 21MCQ

Option a is correct.

Explanation of Solution

Explanation for the correct option:

a.

If there are more travelers from the country U to E, then demand for Euros will increase. This increase in demand for Euros will appreciate the currency value. This appreciation will lower the exchange rate (Euros per US dollar). This will also reduce the demand for the US dollar. Therefore, option a is correct.

Explanation for incorrect options:

b.

If the price level increases, then the demand for the country U dollar will also increase as demand for currency increases with the increasing interest rate. Therefore, option b is incorrect.

c.

If exports increase from the country U, then demand for the country U’s dollar will increase. But in this graph, D1 is moving towards the left. Therefore, option c is incorrect.

d.

People invest in the currency with higher interest rates. Therefore, option d is incorrect

e.

In this, the European currency is appreciating due to which the exchange rate is reducing. This reduction in the exchange rate is resulting in a reduction in demand. Therefore, option e is incorrect.

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.