If U.S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.

Question

If U.S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant. ​

Quizplus · Accepted Answer

Higher U.S. interest rates compared to European rates would make U.S. investments more attractive, decreasing the demand for euros as investors would prefer holding assets in dollars. Conversely, Europeans would find U.S. assets more attractive, increasing the supply of euros to be exchanged for dollars to invest in the U.S.

If US Interest Rates Suddenly Become Much Higher Than European Interest