Suppose the exit of Great Britain from the European Union (“Brexit”) causes a reduction in confidence...
- Suppose the exit of Great Britain from the European Union
(“Brexit”) causes a reduction in confidence in the
euro.
- What would be the effect(s) on the market for US dollars (relative to euros)?
Increase in demand for US dollars
Decrease in demand for US dollars
Increase in supply of US dollars
Decrease in supply of US dollars
Why?
- Graphically illustrate the effect on the equilibrium exchange rate (euros per dollars).
Homework Answers
a) If there is reduction in confidence of Euro, people would withdraw invested in Euro and invest them in Dollars which would raise the demand for dollar. Thus option A is correct.
b) The increase in demand for U.S. currency,
Dollar would appreciate against it while Euro will depreciate.
Exchange rate of $/euro would rise. Equilibrium would rise from E
to E1. 
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