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Use a demand and supply graph to show how increased demand for investments in the US...

Use a demand and supply graph to show how increased demand for investments in the US by foreigners leads to an appreciation of the US dollar in international currency markets. I am looking for the effects of increased foreign investments on exchange rates.

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Answer #1

In diagram, on X axis quantity of dollar is shown, on y Axis exchange rate is shown ,euro per dollar.

Increase in investment demand in US will result in increase demand of US dollar, as foreigners need US dollar to invest in US. So a result demand curve of US dollar increase .

The new demand curve intersect supply curve at a higher exchange rate,so equilibrium exchange rate increases.

Conclusion: Increase in investment in US by foreigners, result in increase in value of US dollar or increase in exchange rate.

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