Question

1. In the long run, the most important determinant of the exchange rate between the US dollar and the Euro is

a. the prices of goods in the US and in Europe.

b. economic growth in the United States.

c. the flow of financial capital.

d. the precautionary motive.

e. speculation.

2. An increase in the U.S. demand for the Euro causes

a. an increase in the U.S. dollar price of a Euro.

b. the Euro to appreciate.

c. the U.S. dollar to depreciate.

d. US imports from Europe to be relatively more expensive.

e. All of the above.

Answer 1

Answer 1 - correct option is A

Reason - in long run the most important determinant of exchange rate between two countries is determined by purchasing power parity hence the exchange rate between US dollars and Euro is will be determined by price of goods in US and Europe

Answer 2 - correct option is E

Reason - As euro currency weakens thee dollar currency which means that as there is fall in value of euro , each dollar buys more euro ,currency dollar price of europian goods starts falling .As a result of which American buys more Euro currency and assets and thus increase the quantity demanded fkr euro by Americans