What are the three factors that affect the demand for foreign ...

[sjones]

What are the three factors that affect the demand for foreign currency?
 
  What will be an ideal response?

Question 2

Describe the chain of events leading to exchange rate determination for the following cases: (a) An increase in U.S. money supply (d) Increase in growth rate of U.S. money supply (c) Increase in world relative demand for U.S.
 
  products (d) Increase in relative U.S. output supply

[SVictor]

Answer to Question 1

The three factors that affect the demand for foreign currency are expected return, risk and liquidity.

Answer to Question 2

Chain of events leading to exchange rate determination:
=  (Pus/PE)
Increase in U.S. money supply: Pus rises in proportion to the money supply; q remains the same. All dollar prices will rise (including dollar price of euro).
Increase in growth rate of U.S. money supply: Inflation rate, dollar interest rate, Pus, E, rises in proportion to Pus.
Increase in world relative demand for U.S. products: E falls, and q does as well.
Increase in relative U.S. output supply: Dollar depreciates, lowers relative price of
U.S. output, rise in q, effect on E is not clear since q and Pus work in opposite directions.