What happens in the foreign exchange market when the price of a foreign currency (exchange rate) falls below its equilibrium value?

Multiple choice question for Exchange-Rate Determination. Select an option, then review the explanation below.

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There is a surplus demand for that currency in the foreign exchange marketThere is an oversupply of the currency in the foreign exchange marketThe demand curve for foreign currency moves outward to the rightThe demand curve for foreign currency shifts inward to the left

Explanation

When the exchange rate is set below the equilibrium price, the quantity demanded of the foreign currency exceeds the quantity supplied, resulting in excess demand in the foreign exchange market.

Practice related questions from the same subject.

1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?
2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?
3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?
4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?
5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?

What happens in the foreign exchange market when the price of a foreign currency (exchange rate) falls below its equilibrium value?

Explanation

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