Supply Shocks and the Foreign Exchange Market

Question

A negative supply shock (for example, a sudden surge in oil prices) tends to increase domestic production costs and the aggregate price level. What is the anticipated indirect effect on the foreign exchange market based on the foreign substitution effect, as depicted in the graph above?

Accepted Answer

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

Answer

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

Answer

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

Answer

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