Suppose the exchange rate between euros and dollars is quoted as EUR/USD=X If yi

Question

Suppose the exchange rate between euros and dollars is quoted as

EUR/USD=X

If yields on financial assets in the U.S. were expected to increase relative to yields on assets in the Eurozone, we would expect

a. an increase in X; that is, a depreciation of the dollar relative to the euro.
b. a decrease in X; that is, a depreciation of the dollar relative to the euro.
c. an increase in X; that is, an appreciation of the dollar relative to the euro.
d. a decrease in X; that is, an appreciation of the dollar relative to the euro.

Explanation / Answer

As the yield of US assets increase then people will demand more US dollars as investing in US assets is profitable. The correct answer is thus C

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