If European inflation suddenly becomes much higher than U.S. inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.
A)increase; decline; upward
B)increase; decline; downward
C)decrease; increase; upward
D)decrease; increase; downward
E)None of these are correct.

Question

Quizplus · Accepted Answer

When European inflation is higher than U.S. inflation, the cost of European goods increases for U.S. consumers, leading to a decrease in U.S. demand for European goods. Additionally, Europeans will find U.S. goods cheaper, increasing their demand for dollars to buy U.S. goods, thus increasing the supply of euros in the market. Both these forces will exert downward pressure on the value of the euro.

If European Inflation Suddenly Becomes Much Higher Than U