Name three factors in the foreign exchange market that affect either the quantity of dollars demanded or the demand for dollars. Discuss whether the factor increases or decreases the number of dollars people want to hold
What will be an ideal response?
Three factors are the exchange rate, the U.S. interest rate differential, and the expected future exchange rate. If the exchange rate rises, the quantity of dollars demanded decreases. If the U.S. interest rate differential is larger (either because the U.S. interest rate rose or because foreign interest rates fell) then the demand for dollars increases. And, if the expected future value of the exchange rate is higher, then the current demand for dollars increases.
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