Suppose there is an increase in the demand for oil, Kuwait's main export good, and market interest rates on?

Tricky question. You have to understand what the question is saying first. So, "An increase in demand for oil, Kuwait's main export" simply means there is upward pressure on Kuwait's currency, the dinar, which will inflate it's value relative to the US dollar. The second part, "market interest rates on financial ets denominated in dinar increase relative to US interest rates", means that Kuwait is a more attractive place to invest since investors can get higher returns on their money. Consequently, American investors send their money to Kuwait which puts even more inflationary pressure on the dinar. The point is, both of these events cause the dinar to rise in value and the US dollar to fall in value, or in other words, a depreciation of the dollar relative to the dinar. The answer is C.