Foreign Automaker Builds Plant
The question
Assume the foreign exchange market for the US dollar is initially in equilibrium. A large automaker based in the fictional country of Kessia announces it will build several assembly plants in the United States, and over the following year it pays US construction firms and US workers to build them. Assume American purchases of foreign goods and assets are unchanged. Show the effect of this investment in the foreign exchange market for the US dollar, holding all else constant. Show the effect on the Foreign Exchange Market (USD) graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Foreign Automaker Builds Plant: the worked answer
On the Foreign Exchange Market (USD) graph, Demand for dollars (D$) shifts right.
Why Demand for dollars (D$) shifts right
The Kessian automaker has to pay US construction firms and US workers in dollars, so it must first exchange Kessian currency for dollars. Foreigners acquiring dollars are the source of the demand for dollars in this market, so this direct investment raises the quantity of dollars demanded at every exchange rate and shifts the demand for dollars to the right. American purchases of foreign goods and assets are unchanged by assumption, so the supply of dollars does not move.
What happens to the equilibrium
The dollar appreciates and the equilibrium quantity of dollars traded increases.
The mistake students make on this one
A common error is shifting the supply of dollars right on the logic that money is flowing into the United States, so there must be more dollars around. What flows in is Kessian currency, which is exchanged for dollars; the dollars are being bought rather than sold, which makes this a demand-side change.
On exam day
Foreign direct investment into the US sits on the same side of the graph as foreigners buying US Treasury bonds. Both require foreigners to obtain dollars first, so both shift D$ right whether the investment is a factory or a financial asset.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Demand for dollars (D$) shifts right and every other curve on the Foreign Exchange Market (USD) graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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