In each of the following scenarios, explain why the euro will appreciate or depreciate in a system of floating exchange rates. A) A recession in Germany cuts German purchases of American goods. B) American investors are attracted by prospects for profit on the Frankfurt Stock Exchange. C) Interest rates on government bonds rise in the U.S. but remain stable in Germany
A) The recession leads to a drop in imports. The supply of euros falls, so the price of euros (the exchange rate) rises. The euro appreciates. B) American investors increase demand for euros in order to buy German stocks. The euro appreciates. C) Investors supply euros in order to obtain dollars to buy U.S. bonds. The euro will depreciate.
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If the Fed maintains an expansionary monetary policy, ________
A) the M2 measure of money decreases B) the real interest rate increases C) banks make less loans D) bank deposits increase
The decision to form a currency union is similar to the decision to peg; however, the currency union requires:
A) a lower level of commitment and therefore requires a lower net benefit. B) a higher level of commitment and therefore requires a higher net benefit. C) more political integration and an agreement to limit trade. D) the loss of political autonomy and is therefore riskier.