If, at the current exchange rate between the dollar and the Norwegian kroner of
ID: 1207831 • Letter: I
Question
If, at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar, the dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond?
A) The demand for the dollar will rise, while the supply of the kroner will fall.
B) The demand for the dollar will fall, while the supply of the kroner will rise.
C) The supply of the dollar will rise, while the demand for the kroner will fall.
D) The supply of the dollar will rise, while the demand for the kroner will rise.
Explanation / Answer
A is Correct When demand for dollar rises it pushes the dollar to appreciate further and on supply side supply of kroner fall which reduces the tradability of kroner to dollar and helps in reducing its value.