Final answer:
The bid/ask spread for small retail transactions typically ranges from .5 to 1 percent in the foreign exchange markets, which affects the exchange rate of currencies such as the U.S. dollar.
Step-by-step explanation:
The bid/ask spread for small retail transactions is commonly in the range of .5 to 1 percent.
When discussing foreign exchange markets and currency transactions, the bid/ask spread represents the difference between the price at which a dealer or broker is willing to buy a currency (bid) and the price at which they are willing to sell it (ask). For small retail transactions, such as individual forex trades or stock purchases, the spread is typically narrower to facilitate the transaction and is competitively priced to attract retail traders.
In the context provided, when interest rates rise, the return on holding a currency like the U.S. dollar becomes more attractive. This leads to an increase in demand for dollars and a decrease in supply—as illustrated by a shift of the demand curve to the right (from Do to D1) and a shift of the supply curve to the left (from So to S1) in the figures provided. Consequently, this increases the exchange rate but may not change the equilibrium quantity traded.