The euro area is now the largest economy in the world. If the European Central Bank raises its interest rates, we expect ________ because the dollar would ________ relative to the euro.

Question

Quizplus · Accepted Answer

If the European Central Bank raises its interest rates, the euro will become more attractive to investors, leading to an appreciation of the euro relative to the dollar. This will make U.S. exports more expensive and imports cheaper, leading to a decrease in aggregate demand and a leftward shift of the IS curve.

The Euro Area Is Now the Largest Economy in the World