Which of the following statements is MOST accurate?
A) In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate.
B) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate.
C) In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate.
D) In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate.
E) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal euro/dollar exchange rate.

Question

Quizplus · Accepted Answer

An increase in the demand for European output would lead to an increase in the demand for euros, causing an increase in the long-run nominal dollar/euro exchange rate. Option A is incorrect because an increase in the demand for U.S. output would increase the demand for dollars, leading to an appreciation of the dollar, and a decrease in the euro/dollar exchange rate. Option C is incorrect because a decrease in demand for U.S. output would decrease the demand for dollars, leading to a depreciation of the dollar, and an increase in the euro/dollar exchange rate. Option D is incorrect because an increase in demand for European output would increase the demand for euros, leading to an appreciation of the euro and a decrease in the dollar/euro exchange rate. Option E is incorrect because it implies an increase in the euro/dollar exchange rate, but the question asks for the long-run nominal dollar/euro exchange rate.

Which of the Following Statements Is MOST Accurate