Question

A) In a recession, would the Fed want to buy or sell Euros? (Circle buy or sell)

B) Would this cause the $ to appreciate or depreciate? (Circle appreciate or depreciate)

C) Would this increase or decrease US exports? (Circle increase or decrease)

Answer 1

When U.S. interest rates decline compared to the rest of the world, the demand for dollars decreases, the supply of dollars increases, and the exchange rate for dollars depreciates compared to euros.

Step-by-step explanation:

The Impact of U.S. Interest Rates on the Demand for Dollars, Supply of Dollars, and Exchange Rate

When U.S. interest rates decline compared to the rest of the world, it can lead to the following impacts:

1. Demand for dollars: The demand for dollars would likely decrease. When interest rates in the U.S. are lower, investors may seek higher returns elsewhere, reducing the demand for dollars.
2. Supply of dollars: The supply of dollars would likely increase. As investors sell their U.S. assets to pursue higher returns in other countries, the supply of dollars in the foreign exchange market would increase.
3. Exchange rate for dollars: The exchange rate for dollars would likely depreciate compared to euros. With decreased demand and increased supply, the value of the dollar would decrease relative to the euro.

So, a decrease in U.S. interest rates compared to the rest of the world would decrease the demand for dollars, increase the supply of dollars, and cause the exchange rate for dollars to depreciate compared to euros.