Question

Changes in _____________,____________, and ___________ can all shift the demand for a foreign currency (or the supply of the domestic currency).

expectations, rates of return, and relative inflation

expectations, rates of return and productivity

expectations, prices, and policies

rates of return, prices, and fiscal policy

If the rate of inflation in the US is 3% and the rate of inflation in Germany is 4%, we expect:

the demand for the Euro to increase and the Euro to appreciate.

the supply of the US dollar to decrease and the dollar to appreciate.

no change in the demand or supply of the US dollar.

the demand for the US dollar to increase and the dollar to appreciate.

Suppose investors in the US are looking to Japan as a place where they should invest for a future high rate of return. This will

increase the demand for US dollars and cause the the dollar to appreciate.

increase the supply of the US dollar and cause the dollar to depreciate.

decrease the supply of the US dollars to the left and cause the US dollar to depreciate.

decrease the demand for US dollars and cause the dollar to appreciate.

Answer 1

1) expectations, relative inflation and rates of return. Which is option A. Inflation with respect of foreign country affects the imports and exports and hence the depreciation and appreciation of the currency. More the rate of return more will be the demand for that currency which is also responsible for factors of demand of foreign currency.

2) The rate of inflation is higher in Germany than in US . So the German imports from US increases and exports from Germany reduces to US. So dollar appreciates. Hence demand for dollar would increase which is option D.

3) option B : increase in supply of US dollar and cause the dollar to depreciate. Because no one would be willing to hold dollar deposits since the rate of return is higher in Japan. So holders of dollar would try to sell them for Japan currency.