2. Suppose that interest rates in the US fall relative to rates in Europe. -What is the predicted effect on the demand for US savings instruments? What explains this prediction? -What is the predicted effect on the demand for the US dollar? What explains this prediction? -Is the US dollar expected to appreciate or depreciate? Show the result in the diagram below.
The following questions refer to the relationship between interest rates and exchange rates.
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1. Suppose that interest rates in the US rise relative to rates in Europe.
-What is the predicted effect on the demand for US savings instruments? What explains this prediction?
-What is the predicted effect on the demand for the US dollar? What explains this prediction?
-Is the US dollar expected to appreciate or depreciate? Show the result in the diagram below.
2. Suppose that interest rates in the US fall relative to rates in Europe.
-What is the predicted effect on the demand for US savings instruments? What explains this prediction?
-What is the predicted effect on the demand for the US dollar? What explains this prediction?
-Is the US dollar expected to appreciate or depreciate? Show the result in the diagram below.
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3. Fill in the blanks:
“
_________________________.”
“Monetary policy that decreases interest rates is predicted to put pressure on a currency to _________________________.”
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