In a floating exchange rate system, how do relatively high productivity and low inflation in the United States affect the demand and supply of foreign currency, and what is the impact on the value of the dollar?

Show Answers

Higher demand for foreign currency, reduced supply of foreign currency, and a decline in the dollar's valueGreater demand for foreign currency, increased supply of foreign currency, and a rise in the dollar's valueLower demand for foreign currency, decreased supply of foreign currency, and a fall in the dollar's valueReduced demand for foreign currency, increased supply of foreign currency, and an appreciation of the dollarNo change in demand or supply of foreign currency, and a stable dollar value

Explanation

When the U.S. experiences higher productivity and lower inflation, it tends to attract foreign investment, increasing both the demand and supply of foreign currency. This dynamic results in an appreciation of the dollar under a floating exchange rate system.