The Foreign Exchange Market Practice Test

Based on the foreign exchange market shown for Canadian dollars (CAD), suppose investors expect Canada’s economy to grow faster than other economies, increasing foreign purchases of Canadian stocks and bonds. Which of the following best describes the change in the market for Canadian dollars?

FOREIGN EXCHANGE MARKET FOR CANADIAN DOLLARS (CAD)

Vertical axis: Exchange rate ($ per C$), price of CAD

Horizontal axis: Quantity of CAD

Demand shifts from D1 to D2; Supply is S

Equilibrium moves from E1 to E2

E1: $0.75/C$ at Q1

E2: $0.80/C$ at Q2

Based on the foreign exchange market shown for Indian rupees (INR), assume the exchange rate is measured as U.S. dollars per rupee (USD/INR). Suppose U.S. firms increase foreign direct investment in India by building factories there, increasing the demand for rupees. Which of the following best describes the change shown and what happens to Indian net exports (exports minus imports) as the rupee changes value?