Question

What would you expect each of the following developments to do to the price of dollars...

What would you expect each of the following developments to do to the price of dollars in euros?
a. European investors lose confidence in American assets and decide to buy fewer American stocks and bonds.
b. The European Union removes its existing tariffs on goods from the United States.
c. Inflation is higher in the United States than in Europe.

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Answer #1

A. This will reduce the demand for dollars with respect to euro. As a result, the exchange value of the dollar will come down and the dollar will depreciate.

B. This will increase the import of US goods to the EU. As a result, the demand for the dollar will increase and the exchange value of the dollar will increase and the dollar will appreciate.

C. Higher inflation will result in a fall in the purchasing power of the dollar. Therefore, the exchange value of the dollar will fall and the dollar will depreciate.

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