Question

Investors from Germany, the United States, and the United Kingdom frequently invest in each other’s currencies based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ________ dollar-denominated securities, and the euro is likely to ________ relative to the dollar.​a. fewer; depreciate
b. fewer; appreciate
c. more; depreciate
d. more; appreciate

Answer 1

Answer:

The correct answer is (a)

Explanation:

Increase in prevailing interest rate can lead to an increase in the demand of a currency. Likewise, if the British interest rate increases, the other countries will likely to buy pounds or fewer dollar-dominated currencies or securities. So, the German investors are likely to buy fewer dollar-dominated securities and the euro is likely to depreciate relative to the dollar.