If the U.S.interest rate falls relative to European interest rates,the dollar tends to ________ in a way ________ by the PPP theory of exchange rates.

Question

Quizplus · Accepted Answer

When the U.S. interest rate falls relative to European interest rates, investors will be less likely to hold U.S. dollars, which will cause the dollar to depreciate. This is predicted by the PPP theory of exchange rates, which states that the exchange rate between two currencies should be equal to the ratio of their price levels.

If the USInterest Rate Falls Relative to European Interest Rates,the Dollar Tends