If Interest Rates on the Euro Are Consistently Below U

question 4

Multiple Choice

If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:

• A) the value of the euro would often appreciate against the dollar.
• B) the value of the euro would often depreciate against the dollar.
• C) the value of the euro would remain constant most of the time.
• D) the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.

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Definitions:

Demand Equation

A mathematical representation of the relationship between the quantity of a good consumers are willing and able to buy and the good's price.

Supply Equation

An economic formula that represents the relationship between the quantity of a good supplied by producers and the price of the good.

Price Floor

A minimum price set by the government for certain goods and services, intended to prevent prices from dropping too low.

Shortage/Surplus

A situation in the market where the amount of a product that consumers want to buy is greater than the amount available (resulting in a shortage), or the available amount is more than what consumers want to purchase (leading to a surplus).