If more European and Japanese firms want to build factories

“If more European and Japanese firms want to build factories and expand their offshore investments in the Unites States, the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity.” Is this statement TRUE or FALSE? Explain WHY.

Solution

False. This is because as more Japanese and European firms invest in offshore activities in the US, they will be giving away US dollars for the same. As a result, their holdings of US dollars will decrease.