If the US interest rate adjusted for peoples expectation of

If the U.S. interest rate, adjusted for people\'s expectation of inflation, increases sharply relative to the rest of the world, then

A. The dollar will depreciate

B, There will be no change in the demand for dollars in foreign exchange markets but there will be an increase in demand for foreign currency

C. there will be a decrease in the demand for dollars in foreign exchange markets

D. thee dollar will appreciate

Solution

Answer:

If the US interest rate adjusted for people\'s expectation of inflation, increases sharply related to the rest of the world, then d) the dollar will appreciate.

If the interest rate increases then, people will find it profitable to buy assets from US economy. They will get more returns from assets as the interest rate is high. As a result the demand for dollar increases, people now demand more dollars to purchase assets in that economy. So, the value of dollar appreciates. This can be shown by the simple diagram.