Question

The current exchange rate is​ $1= €1. Suppose that European real interest rates increase.

What would be expected to happen to the value of the dollar and the value of the euro?

A. The dollar will depreciate, and the euro will depreciate.
B. The dollar will depreciate, and the euro will appreciate.
C. The dollar will appreciate, and the euro will depreciate.
D. The dollar will appreciate, and the euro will appreciate.

Answer 1

The correct answer is C. The dollar will appreciate, and the euro will depreciate.

Step-by-step explanation:

Interest rates are money fluctuations that arise as a result of risks caused by market situations that end up making the loan more expensive and therefore affects the price of one currency over another. In the example given, an increase in interest rates will determine that the euro as the currency of this market falls against the dollar, for this reason it is said that the dollar appreciates against the euro.