Interest Rates and Currency Demand in Forex Markets

Steps:

• Identify demand for a currency: arises from foreigners buying exports, investing, or seeking assets.
• Recognize leftward shift: indicates reduced foreign demand, depreciating the currency under floating rates.
• Evaluate each option's impact on foreign investment or trade motives for holding the currency.
• Select the factor that lowers attractiveness to foreigners, shifting demand left.

Why A is correct:

• Lower interest rates reduce returns on domestic assets, decreasing capital inflows and thus foreign demand for the currency (per interest rate parity).

Why the others are wrong:

• B: Smaller money supply raises interest rates, boosting capital inflows and shifting demand right.
• C: Higher exports increase foreigners' need for the currency to pay, shifting demand right.
• D: More imports raise demand for foreign currency (supply of domestic), but does not shift domestic demand left.

Final answer: A