Assume that U.S. and European governments adopt a system of flexible exchange rates, and the figure below shows the market for euros. Refer to the graph above. If currency traders think the European economy will experience a recession and the U.S. economy will not, then this event will most likely cause the:

Question

Assume that U.S. and European governments adopt a system of flexible exchange rates, and the figure below shows the market for euros.  Refer to the graph above. If currency traders think the European economy will experience a recession and the U.S. economy will not, then this event will most likely cause the:

Quizplus · Accepted Answer

If traders believe that the European economy will experience a recession, they will likely sell euros as they anticipate a decrease in demand for the currency. This will cause the supply of euros to increase, leading to a decrease in the value of the euro (depreciation) relative to the U.S. dollar.

Assume That U