Question

Which of the following gives rise to transaction demand for a currency?

a. The Federal Reserve sells dollars in the foreign currency markets.
b. A U.S. car dealership pays a German manufacturer in euro.
c. A Japanese investor buys U.S. T-bonds, expecting dollars to appreciate.

Answer 1

The correct option that gives rise to transaction demand for a currency is:

b. A U.S. car dealership pays a German manufacturer in euro.

Transaction demand for a currency arises when businesses or individuals need to make payments or engage in transactions using a specific currency. In this case, the U.S. car dealership needs to pay the German manufacturer in euros, which creates a demand for euros to facilitate the transaction.