Question

47. Suppose that the United States and European Union are the only trading partners in the world. If interest rates in the United States are significantly lower than those in the European Union, we would expect the: O demand for the dollar to fall, depreciating the dollar. O supply of the dollar to fall, appreciating the dollar. O supply of euros to increase, depreciating the euro. O demand for euros to decrease, depreciating the euro. 48. Suppose that the United States and European Union are the only trading partners in the world. If the European Union imposes some import tariffs on U.S. goods, we would expect the: O supply of the euro to decrease, depreciating the euro. O demand for the dollar to decrease, depreciating the dollar. O supply of the dollar to decrease, depreciating the dollar. O demand for the dollar to increase, appreciating the dollar. 49. Figure: Change in the Demand for U.S. Dollars Euros per U.S. dollar Supply of U.S. dollars x E2 X1 E1 D2 Quantity of U.S. dollars Refer to Figure: Change in the Demand for U.S. Dollars. The change from D1 to D2 will occur, all other things being equal, if: O interest rates are higher in Europe. O interest rates are higher in the United States. O interest rates in the United States and Europe are equal. O inflation is higher in Europe. 50. If the demand for pounds sterling in the United States rises, then the: O pound depreciates. O pound sterling price of the U.S. dollar increases. O U.S. dollar appreciates. O U.S. dollar price of the pound sterling increases.

Answer 1

47. (a) Demand for the dollar to fall, depreciating the dollar

EXPLANATION - when interest rates are low, the dollar would be considered less valuable than the euro. Hence , the demand for dollar falls, and depreciation of the Dollar happens.

48. (b) Demand for the dollar to decrease, depreciating the dollar

EXPLANATION - When the European Union places an import tariff on US goods to its own consumers, this will make US goods more expensive and thus people in the EU will demand less of dollars to buy these goods. Thus, they would to not wantpay more Euros to get a dollar which is why they would stop demanding US goods and the dollar. This depreciates the US Dollar.

49. (b) The interest rates are higher in the United States

EXPLANATION - When US interest rates are higher, the dollar would appreciate. Hence, for one dollar , people could buy more Euros, which is reflected from the increase in Euros per dollar (X1 to X2).

50. (d) US Dollar price of the pound sterling increases

EXPLANATION - The pound sterling appreciates , thus for one pound sterling, one could get more US Dollars, i.e. the price of US Dollar on 1 pound sterling increases, or for one pound sterling, one would get more amount of US Dollars.