US Economic Growth Boosts Demand for Dollars via Capital Inflows

Steps:

• Demand for USD increases when foreigners seek US assets or exports.
• Faster US growth signals stronger returns and stability, drawing foreign investors.
• Investors convert foreign currency to USD to buy US stocks, bonds, or direct investments.
• Resulting capital inflows shift the demand curve rightward from D1 to D2.

Why B is correct:

• Higher growth raises expected returns on US assets, increasing foreign capital inflows and demand for USD per international investment theory.

Why the others are wrong:

• A: Lowers Chinese growth and imports, reducing foreign demand for US exports and USD.
• C: Shrinks US borrowing needs, potentially lowering interest rates and capital inflows to the US.
• D: Reduces returns on US assets, decreasing foreign investment and demand for USD.

Final answer: B