During the period 2001-2004, the U.S. Federal Reserve lowered nominal interest rates on the dollar by more than the European Central Bank (ECB) did on the euro, a move that most market participants viewed as temporary. What was the effect on the dollar-euro exchange rate?
a. The dollar depreciated against the euro.
b. The dollar appreciated against the euro.
c. There was no change in the dollar-euro rate because expectations adjusted.
d. There was no change in the dollar-euro rate because real interest rates were unchanged.
Answer: a. The dollar depreciated against the euro
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Refer to the above figure. Suppose E is the original equilibrium. An increase in the U.S. demand for Japanese-made goods will lead to
A) a depreciation of the yen and an increase in the quantity of yen sold per week. B) a depreciation of the yen and a decrease in the quantity of yen sold per week. C) an appreciation of the yen and an increase in the quantity of yen sold per week. D) an appreciation of the yen and a decrease in the quantity of yen sold per week.
What is the Laffer Curve? Explain the relationship that is shown in the curve.
What will be an ideal response?