O Levels Economics (2281)•2281/12/M/J/19
Explanation
Falling oil prices reduce global USD demand
Steps:
- Oil demand is price-inelastic, so a rapid price fall causes only a small rise in quantity demanded.
- Total global spending on oil decreases due to lower prices and inelastic demand.
- Since oil is paid in USD, importers need less USD to buy oil, reducing USD demand.
- Lower USD demand in forex markets depreciates the USD exchange rate.
Why C is correct:
- Less demand for USD from oil purchases lowers its value, as per the foreign exchange demand-supply model where reduced demand shifts the curve left, falling the price (exchange rate).
Why the others are wrong:
- A: Demand for USD decreases, not increases, so exchange rate falls.
- B: Supply of USD is unaffected; the effect stems from demand, not supply.
- D: Supply of USD does not decrease; value falls due to demand reduction.
Final answer: C
Topic: Foreign exchange rates
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