Question

Other things the same, if the price level falls, people

a. decrease foreign bond purchases, so the supply of dollars in market for foreign-currency exchange increases.

b. increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases.

c. decrease foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases.

d. increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange increases.

please explain!

Answer 1

If price level falls in domestic country, then price of bonds will rise in domestic country. So people will increase purchase of bonds in foreign countries. To purchase bonds in foreign country you would require foreign currency beacuse of which you exchange domestic currency (dollar) with foreign currency as a result of which supply of dollar increases in the market of foreign currency exchange.

Option d is correct.

increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange increases.