Which of the following affects the supply of the U.S. dollar in the foreign exchange market?
I. Exports from the United States increase due to depreciation of the U.S. dollar
II. U.S. citizens invest in foreign firms and assets
III. Demand for imports from abroad by U.S. citizens
I only
II only
III only
II & III
I & II
I and II only
The correct answer is II & III.
II affects the supply of the U.S. dollar because when U.S. citizens invest in foreign firms and assets, they sell U.S. dollars to obtain foreign currency.
III also affects the supply of the U.S. dollar because when U.S. citizens demand imports from abroad, they need to exchange U.S. dollars for foreign currency, which decreases the supply of the U.S. dollar in the foreign exchange market.
I, however, affects the demand for the U.S. dollar, not the supply. When exports from the United States increase due to depreciation of the U.S. dollar, it leads to an increase in the demand for U.S. dollars, as more foreign buyers need to purchase U.S. dollars to pay for the increased exports.