An increase in the interest rate in the United States would bring about the foll

Question

An increase in the interest rate in the United States would bring about the following effects:

Traders will start selling bonds denominated in euros and buying bonds denominated in dollars.

Traders will start selling bonds denominated in dollars and buying bonds denominated in euros.

The euro depreciates and the dollar appreciates.

(a) and (c).

None of the above.

Traders will start selling bonds denominated in euros and buying bonds denominated in dollars.

Traders will start selling bonds denominated in dollars and buying bonds denominated in euros.

The euro depreciates and the dollar appreciates.

(a) and (c).

None of the above.

Explanation / Answer

Option a and c both are correct

An increase in the interest rate in the United States would bring about the following effects:

- Traders will start selling bonds denominated in euros and buying bonds denominated in dollars. (owing to higher rate of interest on bonds denominated in dollars)

- The euro depreciates and the dollar appreciates. (inflow of capital would increase demand for dollars, as a result, the dollar would appreciate and the euro would depreciate)

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