Question

€/$ exchange rate Euro quantity demanded Euro quantity supplied

0.00 275 25

0.25 250 50

0.50 225 75

0.75 200 100

1.00 175 125

1.25 150 150

1.50 125 175

1.75 100 200

2.00 75 225

If the European Central Bank decreases interest rates, what will happen to the supply and/or demand situation for the euro? How is the equilibrium exchange rate and quantity affected?

Suppose that EU inflation is higher than US inflation. What will happen to the supply and/or demand situation for the euro? How is the equilibrium exchange rate and quantity affected?

Suppose more Europeans travel to the United States. Using the table above, find the new equilibrium. Assume the shift(s) causes the affected curve(s) to shift by 50 in the appropriate direction.

Suppose that the Federal Reserve (the US central bank) takes measures to lower interest rates. Facing the same economic conditions, the European Central Bank also decides to lower interest rates. Using the data in the table above, calculate the new equilibrium. Assume the subsequent shift(s) causes the affected curve(s) to shift by 50 in the appropriate direction.

Answer 1

Q: If the European Central Bank decreases interest rates, what will happen to the supply and/or demand situation for the euro? How is the equilibrium exchange rate and quantity affected?
Ans:.....
If the European Central Bank decreases interest rates then it will lead to outflow of funds from European region. This will lead to fall in the demand for EURO. Therefore the Euro will depreciate
i.e. €/$ will fall.

Q: Suppose that EU inflation is higher than US inflation. What will happen to the supply and/or demand situation for the euro? How is the equilibrium exchange rate and quantity affected?
   Ans:...
The higher European inflation will lead to increased import in European region. This will lead to fall in the demand for euro therefore the euro will depreciate
i.e. €/$ will fall.

Q: Suppose more Europeans travel to the United States. Using the table above, find the new equilibrium. Assume the shift(s) causes the affected curve(s) to shift by 50 in the appropriate direction.
Ans:..
The demand for euro will fall by 50. The new equilibrium quantity will be 125 and the equilibrium exchange rate is 1 €/$.

Q: Suppose that the Federal Reserve (the US central bank) takes measures to lower interest rates. Facing the same economic conditions, the European Central Bank also decides to lower interest rates. Using the data in the table above, calculate the new equilibrium. Assume the subsequent shift(s) causes the affected curve(s) to shift by 50 in the appropriate direction.
Ans:....
The equilibrium is where the demand and supply of euros were equal, before the equilibrium exchange rate were at 1. 25 at this exchange rate the quantity of quantity demanded and quantity supplied were equal.
Lowering the interest rate is a part of the expansionary monetary policy and it increases the money supply in the economy. When there is lower interest rate the household and business can borrow more. hence the money supply increases.