Question

If there is an increase in the U.S. demand for European goods, then the dollar will...

If there is an increase in the U.S. demand for European goods, then

the dollar will appreciate against the euro.
the dollar will depreciate against the euro.
the exchange rate between the dollar and the euro will remain unchanged, but their exchange rates will appreciate against other currencies.
both the dollar and the euro will appreciate.
both the dollar and the euro will depreciate.
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Answer #1

So, let’s assume that “US” be the home country and “Europe” be the foreign country and “dollar” be the home currency. Now, as the there is an increase in US demand for “European goods”, => the demand for foreign exchange will increases, => given the supply of the foreign exchange the equilibrium exchange rate will increases, => there will be a depreciation of the home currency, => dollar will depreciate against the euro.

=> “B” be the correct answer.

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