Question

Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to theright, except:

Answer 1

Answer:

The answer to the given question would be option C. or an increase in the real interest rate on U.S. assets.

Explanation:

• An increase in the real interest rate on US financial assets basically imply a higher financial cost of borrowings of these assets which would consequently reduce the demand for US assets among foreign investors or borrowers.
• As the real interest rate on US assets goes up,the foreign investor have to pay more as interest on any borrowing of the US assets in US dollars.Therefore,the periodic interest payments in terms of US dollars also increases for the foreign or international financial investors which will eventually reduce the demand for US dollars in the foreign exchange market for US dollars.
• As a result of such occurrence,the demand curve for US dollars would shift leftward or downward thereby reducing the currency value of US dollars relative to other foreign or international currencies.