Question

If the current exchange rate is 1.00 euro per dollar and the expected exchange rate at the end of the month rises to 1.20 euros per dollar, then the demand for dollars ________ because people expect holding of dollars to become ________ profitable.

Answer 1

Increases; More

Step-by-step explanation:

Given that,

Current exchange rate:

$1 = 1 euro

Expected exchange rate:

$1 = 1.20 euros

The above exchange rate indicates that there is an appreciation in value of dollar and a depreciation in the value of euro. An appreciation of a dollar will lead to increase the demand for dollar because people expect that holding dollar is more profitable than euro.

With the expected exchange rate, a europian resident have to pay more for per dollar purchase in future as compared to the current exchange rate.