Question

​ If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant).Group of answer choices

a. be unchanged

b. depreciate

c. appreciate

d. depreciate but only briefly

Answer 1

c. appreciate

Step-by-step explanation:

If the Federal Reserve reduces the interest rate of the US dollar this will lead to lower cost of funds, more people will borrow money and this increases money supplied to the economy.

Excess money will pursue less goods leading to inflation where the purchasing power of the US dollar will reduce.

All things being equal the value of the euro will appreciate against the US dollar if interest rate is decreased.

As the euro strengths against the US dollar, one will need less euros to purchase the weakened dollar.