Assuming Sticky Prices and Given Expectations of Future Exchange Rates

question 6

Multiple Choice

Assuming sticky prices and given expectations of future exchange rates, what is the short-run effect on the exchange rate of the U.S. dollar (purchasing euros) and on domestic and foreign rates of return if there is a temporary increase in the quantity of euros?

• A) Rates of return on domestic and foreign assets diverge, as the dollar appreciates.
• B) Domestic and foreign rates of return both fall, as the dollar depreciates.
• C) Domestic and foreign rates of return converge, as depreciation of the euro raises returns for U.S. investors who purchase euro-based assets.
• D) Rates of return on dollar assets fall, causing investors to switch into euro assets and, therefore, the U.S. dollar depreciates against the euro.

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Definitions:

Registered

The status of having officially recorded information in a formal registry or database, typically to confirm authenticity or compliance.

Priority

The established right or order of precedence, often in the context of legal claims, debts, or interests over assets.

Personal Property Legislation

Laws and regulations governing the rights, ownership, and disputes of personal property, which is any movable property that is not fixed immovably to land.

Chattel Mortgage

A loan that is secured by movable personal property, such as a vehicle or mobile home, which the borrower can use while paying off the loan.