An decrease in Italy's interest rate and an decrease in Italy's price level relative to U.S. price level have the same effect on the exchange rate between the two countries.

Question

Quizplus · Accepted Answer

A decrease in Italy's interest rate would likely lead to a depreciation of the euro relative to the dollar, as lower interest rates reduce foreign investment in Italy, decreasing demand for the euro. Conversely, a decrease in Italy's price level relative to the U.S. price level would likely lead to an appreciation of the euro relative to the dollar, as Italian goods become cheaper for U.S. consumers, increasing demand for the euro to purchase these goods.

An Decrease in Italy's Interest Rate and an Decrease in Italy's