If the European Central Bank increases interest rates
A) the demand curve for European euros shifts rightward and the supply curve of European euros shifts leftward.
B) the demand curve for European euros shifts leftward and the supply curve of European euros shifts rightward.
C) the demand curve for European euros and the demand curve for U.S. dollars both shift rightward.
D) the demand curve for European euros shifts leftward and the demand curve for U.S. dollars shifts rightward.

Question

Quizplus · Accepted Answer

When the European Central Bank increases interest rates, it makes holding euros more attractive due to higher returns on investments denominated in euros. This increases the demand for euros as investors seek to benefit from the higher interest rates, shifting the demand curve rightward. Simultaneously, the higher interest rates make borrowing in euros more expensive, reducing the supply of euros as fewer entities are willing to sell or lend euros, shifting the supply curve leftward.

If the European Central Bank Increases Interest Rates