Question

With the start of the subprime financial crisis in August 2007, the dollar ________ in value against the euro as the Fed lowered interest rates. By December of 2008, with the financial crisis spreading throughout Europe, foreign central banks cut their interest rates, leading to a ________ in the value of the dollar relative to the euro. A) rose; further increase B) rose; decline C) declined; rise D) declined; further decline

Answer 1

Answer:

C) declined; rise

Explanation:

When the fed cut the interest rates, the value of the dollar fell against the euro, because lower interest rates means that investors get a lesser return for their dollar assets, and as result, prefer to invest in euros, leading to a devaluation of the American currency.

The opposite occurred when the European Central Bank cut interest rates in Europe, after the financial crisis spread there. Again, lower interest rates in Europe meant that investors would earn a lower retunr on their euro assets, and because of that, they preferred to invest in dollars, or move to other currencies (for example, currencies from developing countries like China).