1.Which of the following would increase the demand for U.S. dollars in the foreign exchange market?

A)   The purchase of Japanese electronics by American consumers.

B)   The purchase of a Chinese company by a U.S. investor.

C)   Spending by U.S. tourists in Brazil.

D)   The sale of U.S. computers to Belgian consumers.

2.For most goods and services, supply and demand are independent. For currencies on the foreign exchange market, however, supply and demand are affected by the same factors. This is most likely to cause:

A)   greater volatility in the quantity of currencies traded.

B)   imbalances that require central banks to intervene in the foreign exchange market.

C)   greater volatility in exchange rates.

D)   the equilibrium model, using supply and demand curves, to be invalid for currencies.

1.Which of the following would increase the demand for U.S. dollars in the foreign exchange market?

A)   The purchase of Japanese electronics by American consumers.

B)   The purchase of a Chinese company by a U.S. investor.

C)   Spending by U.S. tourists in Brazil.

D)   The sale of U.S. computers to Belgian consumers.

The correct answer was

The sale of U.S. computers to Belgian consumers would require Belgian entities to buy the computers from U.S. manufacturers thereby converting their euros to dollars. Thus, there would be a supply of euros and a demand for U.S. dollars in the foreign exchange market. The other choices would all cause a supply of dollars and a demand for the foreign currency in the foreign exchange marketplace.

2.For most goods and services, supply and demand are independent. For currencies on the foreign exchange market, however, supply and demand are affected by the same factors. This is most likely to cause:

A)   greater volatility in the quantity of currencies traded.

B)   imbalances that require central banks to intervene in the foreign exchange market.

C)   greater volatility in exchange rates.

D)   the equilibrium model, using supply and demand curves, to be invalid for currencies.

The correct answer was C)

The interdependence of supply and demand for currencies means an increase in demand for a currency will coincide with a decrease in supply of that currency on the foreign exchange market. The result is that exchange rates are more volatile than the prices of goods for which supply and demand are independent.