Question

Holding other variables constant, if the German economy, the leader in the euro zone, enters a...

Holding other variables constant, if the German economy, the leader in the euro zone, enters a period of economic growth:


Select one:

there should be no change in the price of the euro in dollars.

the euro should appreciate relative to the dollar

the euro should depreciate relative to the dollar

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Answer #1

Answer : the euro should appreciate relative to the dollar

Holding other variables constant, if the German economy enters a period of economic growth, its currency which is Euro must appreciate against other currencies.

When an economy is experiencing growth it will result in a currency appreciation. Then the value of the currency increases and there will be changes in the exchange rate accordingly. On the other hand, when the country has a weakening economy it will lead to currency depreciation. Gradually, it will devalue the currency and thereby changes its exchange rate.

The currency will not be stable relative to other currencies, if the economy is experiencing a growth.

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