"In the foreign exchange market, if the demand for the U.S. dollar increases, the U.S. dollar appreciates in value." Briefly explain whether the previous statement is correct or incorrect.
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Answer:
ReplyDeleteThe statement is correct. The increase in the demand for dollars shifts the demand curve for dollars rightward and creates a shortage of dollars at the initial exchange rate. This shortage puts upward pressure on the exchange rate and so the exchange rate rises to its new equilibrium value.