The following figure depicts the demand for Chinese yuan in the foreign currency

Question

The following figure depicts the demand for Chinese yuan in the foreign currency exchange market Use this figure to answer the questions that follow: If the interest rates in China rise relative to interest rates in the United States, the demand curve in the figure above will not shift because interests rates are not related to exchange rates will not shift because interests rates only affect the supply curve can either increase from D_1 to D_2 or decrease from D_1 to D_3 will increase from D_1 to D_2 will decrease from D_1 to D_3

Explanation / Answer

Will increase from D1 to D2

If intrest rates given are increased then certainly more people want to save money in form of CNY which will increase its the demand for chinese currency.

If inflation is lower in china only then people will prefer to invest, If inflation is high real intrest rates earned can be very low.

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