Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Interest rates increase in the EU → Attracts foreign investment → Demand for Euro increases → Value of Euro rises relative to USD
B
Interest rates increase in the EU → Demand for USD increases → Capital flows to the U.S. → Value of Euro falls
C
Interest rates increase in the EU → Investors withdraw from the EU → Demand for Euro decreases → Value of Euro falls
D
Interest rates increase in the EU → Capital flows out of the EU → Demand for Euro decreases → Value of Euro remains unchanged
Understanding the Answer
Let's break down why this is correct
Answer
When interest rates increase in the European Union, it makes investments in that region more attractive because investors can earn higher returns on their money. As a result, more investors from other countries want to move their capital to the EU to take advantage of these better rates. This increased demand for euros occurs as investors exchange their home currencies for euros to make their investments. Consequently, the euro's value rises compared to other currencies because more people want to buy it. For example, if an investor in the United States sees that the interest rates in the EU are higher, they might convert dollars to euros to invest in European bonds, thus increasing the demand for euros.
Detailed Explanation
When interest rates go up in the EU, it attracts investors from other countries. Other options are incorrect because This answer suggests that higher interest rates in the EU make people want US Dollars more; This option says investors leave the EU when interest rates rise.
Key Concepts
Capital Flows
Currency Value
Interest Rates
Topic
Capital Flows and Currency Value
Difficulty
medium level question
Cognitive Level
understand
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