If people expect the future exchange rate for dollars will be lower, then in the foreign exchange market the current
A
quantity demanded of dollars decreases.
B
supply of dollars decreases.
C
demand for dollars increases.
D
quantity demanded of dollars increases.
E
demand for dollars decreases.
E. demand for dollars decreases.
To answer this question, let’s consider the effects of expectations on the foreign exchange market.
When people expect the future exchange rate for dollars to be lower, it means they anticipate that the value of the dollar will decrease relative to other currencies in the future. This expectation influences the current demand and supply of dollars in the foreign exchange market.
If people expect the dollar to lose value in the future, they will be less willing to hold dollars today because they believe the currency will be worth less in the future. As a result, the current demand for dollars will decrease as people try to sell their dollars and invest in other currencies that they expect to appreciate or hold their value better.
Therefore, the correct answer is:
E. demand for dollars decreases.
When the future exchange rate for dollars is expected to be lower, the current demand for dollars in the foreign exchange market will decrease.