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Capital Flows and Currency Value
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Higher interest rates in the European Union increase capital flows towards Europe, just as a sunny day attracts more people to the beach. What effect does this have on the demand for the U.S. dollar?

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Choose the Best Answer

A

Decrease in demand for the U.S. dollar

B

Increase in demand for the U.S. dollar

C

No effect on the demand for the U.S. dollar

D

Fluctuation in demand for the U.S. dollar

Understanding the Answer

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Answer

When interest rates in the European Union go up, it means that people can earn more money from savings or investments there. This makes Europe an attractive place for investors, similar to how a sunny day draws more people to the beach. As more investors move their money to Europe, they often need to exchange their U. S. dollars for euros to make those investments.

Detailed Explanation

When more money flows to Europe, people need euros. Other options are incorrect because Some might think that higher interest rates make the dollar more attractive; This choice suggests nothing changes.

Key Concepts

Capital flows
Currency value
Interest rates
Topic

Capital Flows and Currency Value

Difficulty

easy level question

Cognitive Level

understand

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