In an open economy, what is the primary source of demand for dollars in the foreign-currency exchange market?

• A. The U.S. government printing more dollars
• B. Domestic investment in U.S. infrastructure
• C. U.S. residents buying foreign goods and services
• D. Foreigners purchasing U.S. goods, services, and assets

Answer: (D)

Verified step by step guidance

1. Understand that the foreign exchange market involves the demand and supply of different currencies, including the U.S. dollar.
2. Recognize that demand for a currency arises when foreign entities want to buy goods, services, or assets priced in that currency.
3. Identify that when foreigners purchase U.S. goods, services, or assets, they need to obtain U.S. dollars to complete these transactions, creating demand for dollars.
4. Contrast this with other options: U.S. residents buying foreign goods would create demand for foreign currencies, not dollars; domestic investment does not directly create foreign demand for dollars; and printing more dollars affects supply, not demand.
5. Conclude that the primary source of demand for dollars in the foreign exchange market is foreigners purchasing U.S. goods, services, and assets.