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

• A. U.S. firms investing domestically
• B. Foreign residents buying U.S. exports
• C. The U.S. government printing more dollars
• D. U.S. residents purchasing foreign goods, services, or assets

Answer: (D)

Verified step by step guidance

1. Understand the foreign exchange market in an open economy, where currencies are traded based on international transactions.
2. Recognize that the supply of dollars in the foreign exchange market comes from U.S. residents who need to exchange their dollars for foreign currencies.
3. Identify that when U.S. residents purchase foreign goods, services, or assets, they supply dollars to the market to obtain foreign currency.
4. Contrast this with other options: U.S. firms investing domestically do not supply dollars abroad; foreign residents buying U.S. exports demand dollars; and the U.S. government printing more dollars affects money supply but not directly the foreign exchange supply.
5. Conclude that the primary source of the supply of dollars in the foreign exchange market is U.S. residents purchasing foreign goods, services, or assets.