If the interest rate in the U.S. decreases relative to interest rate in Europe, the exchange rate for the U.S. dollar will ..... relative to the euro, the currency of the European Union. However, domestic business investment in the U.S. will .....

FOREIGN CURRENCY MARKETS

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

If the interest rate in the U.S. decreases relative to interest rate in Europe, the exchange rate for the U.S. dollar will ____ relative to the euro, the currency of the European Union. However, domestic business investment in the U.S. will ____

A	appreciate, decrease
B	appreciate, increase
C	depreciate, decrease
D	depreciate, increase

Explanation:

Detailed explanation-1: -Lower interest rates will reduce speculative demand for assets and therefore reduce demand for a currency. When interest rates are low, foreign investors will be put off from investing – which will ultimately weaken a country’s currency value.

Detailed explanation-2: -Generally, higher interest rates increase the value of a country’s currency. Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country’s currency.

Detailed explanation-3: -– An increase in the U.S. (European) money supply causes a proportional long-run depreciation (appreciation) of the dollar against the euro. – A rise in the interest rate on dollar (euro) denominated assets causes a depreciation (appreciation) of the dollar against the euro.

Detailed explanation-4: -Higher interest rates can increase a currency’s value. They can attract more overseas investment, which means more money coming into a country and higher demand for the currency.

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ECONOMICS (CBSE/UGC NET)

ECONOMICS

FOREIGN CURRENCY MARKETS