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

Question

Quizplus · Accepted Answer

Higher U.S. interest rates make U.S. investments more attractive, leading to decreased demand for euros as investors prefer holding dollars. Simultaneously, Europeans would exchange more euros for dollars to invest in the U.S., increasing the supply of euros.

If US Interest Rates Suddenly Become Much Higher Than European Interest