Figure 18-1
-Refer to Figure 18-1.Suppose that the U.S.government deficit decreases,causing interest rates in the United States to fall relative to those in the European Union.Assuming all else remains constant,how would this be represented?
A)Supply would decrease,demand would decrease and the economy moves from B to C to D.
B)Supply would increase,demand would decrease and the economy moves from C to B to A.
C)Supply would decrease,demand would increase and the economy moves from A to D to C.
D)Supply would increase,demand would increase and the economy moves from D to A to B.

Question

Figure 18-1 
-Refer to Figure 18-1.Suppose that the U.S.government deficit decreases,causing interest rates in the United States to fall relative to those in the European Union.Assuming all else remains constant,how would this be represented?
A)Supply would decrease,demand would decrease and the economy moves from B to C to D. 
B)Supply would increase,demand would decrease and the economy moves from C to B to A. 
C)Supply would decrease,demand would increase and the economy moves from A to D to C. 
D)Supply would increase,demand would increase and the economy moves from D to A to B.

Quizplus · Accepted Answer

A decrease in U.S. government deficit would cause interest rates in the United States to fall relative to those in the European Union. This would increase the supply of dollars, as investors would be less interested in holding them, and decrease the demand for euros, as investors would be more interested in holding dollars. This would result in a shift from point C to point B along the supply and demand curve for euros. As a consequence, the dollar would appreciate and the euro would depreciate against each other.

Figure 18-1 -Refer to Figure 18-1.Suppose That the U.S.government Deficit Decreases,causing Interest