When the U.S. dollar appreciates relative to other world currencies,
I. the prices of all domestic stocks and bonds can be expected to increase.
II. the prices of securities offered by manufacturers that import a lot of their parts can be expected to increase.
III. an increase in the purchase of U.S. securities by foreign investors can be expected.
Explanation
Answer: C - When the U.S. dollar appreciates relative to other world currencies, the prices of securities offered by manufacturers that import a lot of their parts can be expected to increase. This is because the dollar will buy more, so the parts will cost these firms less. All else equal, a decrease in expenses leads to increased cash flow, which leads to an increase in the prices of the securities offered by these firms. Not all domestic companies will benefit from the appreciation of the dollar. In particular, firms that export their products overseas may be hurt since their products will now cost the foreign consumer more in terms of their own country’s currency, and they may seek another supplier. A similar argument exists for why Selection III is not correct. U.S. securities will be more expensive to foreign investors, who may decide to invest in other foreign markets.
