Considering the market for U.S. dollars and Japanese yen, where the horizontal axis is the quantity of dollars, explain what is likely to happen to the demand and supply of dollars, as well as the exchange rate, if U.S. interest rates rise relative to Japanese rates.

What will be an ideal response?

If U.S. interest rates rise relative to Japanese rates we should see the demand for dollars increase (shift to the right) as some investors in Japan will want to invest in U.S. assets to earn a higher return. This increase in demand will cause the dollar to appreciate relative to the yen.