Question

If the current exchange rate is 1.00 euro per dollar and the expected exchange rate at the end of the month rises to 1.20 euros per dollar, then the demand for dollars _____ because people expect holding of dollars to become _____ profitable.

A. increases; more
B. decreases; more
C. does not change; neither more nor less
D. decreases; less
E. increases; less

Answer 1

The correct answer is D.

Step-by-step explanation:

If the expected exchange rate at the end of the month rises to 1.20 euros per dollar, it means that the euro is expected to strengthen and the dollar is expected to weaken. This will make holding of dollars less profitable, as the purchasing power of dollars will decrease when converted into euros. As a result, the demand for dollars will decrease.