Is a depreciation of the dollar/euro exchange rate correlated with a decrease in the dollar return on U.S. deposits?
What will be an ideal response?
No.
Assume that the Interest Parity is maintained, i.e.,
R$ = + ( - )/
Holding constant, one would expect a depreciation of the dollar/euro exchange rate (i.e. increase in ) to be correlated with a decrease in R$, dollar returns on euro deposits. However, the higher expected inflation in the U.S. implies an increase in the , the expected future dollar to euro exchange rate. Thus, the quantity ( - )/ goes up and, increases despite a depreciation in the current dollar to euro exchange rate, .
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A) Comparative statics is a tool that can be used in both optimization in levels and optimization in differences. B) Marginal analysis is a key tool used while optimizing in levels. C) Comparative statics involves calculating the incremental cost of moving from one alternative to the next best alternative. D) Marginal analysis is the comparison of economic outcomes before and after some economic variable is changed.
For "an increase in the quantity demanded" but not "an increase in demand" to occur, there must be a
A) rightward shift of the demand curve. B) movement along the demand curve. C) rightward shift of the demand curve and a movement along the demand curve. D) Both answers B and C are correct.