1. Which of the following causes appreciation of the U.S. dollar versus the euro
ID: 1120904 • Letter: 1
Question
1. Which of the following causes appreciation of the U.S. dollar versus the euro? a. The incomes of Europeans fall. b. Interest rates in the United States are higher than in Europe. c. The price level in the United States is higher than in Europe d. Speculators assume the value of the dollar will fall in the future. 2. Which of the following would most likely cause depreciation of the U.S. dollar versus the Japanese yen? a. Higher interest rates in the United States than Japan. b. A recession in the United States. c. More Japanese visitors to Hawaii. d. More demand for U.S. coal by Japan. 3. Speculation in foreign exchange markets a. Creates worldwide inflation. b. Cannot happen under flexible exchange rates. c. Occurs only with well-known currencies (e.g., dollar, euro). d. Often promotes foreign exchange stability 4. The supply of U.S. dollars originates from a. American demand for imported goods. b. American investment in foreign countries. c. Demand for foreign currency for speculative purposes. d. All of the answers are correctExplanation / Answer
1. Answer- option (b)
If interest rate is higher in the U.S than Europe, it will attract foreign investment (as high return on investment can be earned). When Europe (Foreign) starts investing in the U.S , this increases the Demand for U.S dollars in the Forex market and value of U.S dollars also increases. This will cause appreciation of U.S dollar against the Euro.
2. Answer- option (b)
A recession in the united States means interest rate in the U.S will fall compared to Japan. This will make U.S less attractive to foreign investors to save money. So, they will sell dollars and buy other countries' currencies where interest rate is high. Thus the dollars value will reduce. Therefore it can be concluded that recession in the US causes depreciation of dollar versus the Japanese Yen.
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