Impact of Economy on Exchange Rates. Assume that inflation is zero in the United

Question

Impact of Economy on Exchange Rates. Assume that inflation is zero in the United States and in Europe, and will remain at zero. U.S. interest rates are presently the same as in Europe. Assume that the economic growth for the United States is presently similar Europe's. Assume that international capital flows are much larger than international trade flows. Today, there is news that clearly signals economic conditions in Europe will be weakening in the future, while economic conditions in the United States will remain the same. How would the euro's value change today based on this information?

A) The supply of euros to be exchanged for dollars should increase as European investors attempt to benefit from relatively high U.S. interest rates

B) The supply of euros to be exchanged for dollars should decrease as European investors attempt to benefit from relatively high U.S. interest rates.

C) The supply of euros to be exchanged for dollars should remain the same as European investors attempt to benefit from relatively high U.S. interest rates.

A) The supply of euros to be exchanged for dollars should increase as European investors attempt to benefit from relatively high U.S. interest rates

B) The supply of euros to be exchanged for dollars should decrease as European investors attempt to benefit from relatively high U.S. interest rates.

C) The supply of euros to be exchanged for dollars should remain the same as European investors attempt to benefit from relatively high U.S. interest rates.

Explanation / Answer

Correct Answer:

A. The supply of euros to be exchanged for dollars should increase as European investors attempt to benefit from relatively high U.S. interest rates.

Explanation:

Relatively high US interest rates will give better return and it will increase the demand of Dollar. Investors will buy dollars through the sale of Euros. Thus, supply of Euro will increase to be exchanged with Dollars.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.