Interest Rate Effect On The Foreign Exchange Market

Question

Using the foreign exchange market graph above, if an increase in the aggregate price level drives up domestic interest rates (the interest rate effect), which outcome is most likely in the foreign exchange market?

Accepted Answer

A rightward shift in the demand curve for U.S. dollars, resulting in an appreciation of the dollar.

Answer

A rightward shift in the supply curve for U.S. dollars, leading to a depreciation of the dollar.

Answer

A leftward shift in the demand curve for U.S. dollars, leading to a depreciation of the dollar.

Answer

A leftward shift in the supply curve for U.S. dollars, resulting in an appreciation of the dollar.