AP Macroeconomics Question 378: Answer and Explanation
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1. Suppose that households increase the demand for U.S. Treasury bonds as financial assets. Which of the following accurately describes changes in the money market, the interest rate, and the value of the dollar in foreign currency markets?
MONEY MARKET INTEREST RATE DOLLAR
- A. Increased supply Rising Appreciates
- B. Increased demand Rising Appreciates
- C. Decreased demand Falling Appreciates
- D. Decreased supply Falling Depreciates
- E. Decreased demand Falling Depreciates
Correct Answer: E
E-An increase in demand for bonds as a financial asset decreases the demand for money and lowers the interest rate. A lower interest rate in the U.S. money market makes the United States a less attractive place for foreign investors to place their money. This decreased demand for dollars depreciates the value of the dollar relative to foreign currencies.