Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Investors move their capital to the EU, increasing demand for the Euro and decreasing demand for the U.S. dollar.
B
Investors will ignore the EU's interest rates and keep their capital in the U.S., leading to a stronger dollar.
C
The increase in interest rates causes a reduction in foreign investment in the EU.
D
There is no effect on capital flows as interest rates are irrelevant to currency values.
Understanding the Answer
Let's break down why this is correct
Answer
When interest rates in the European Union rise, it usually attracts more foreign investors looking for better returns on their investments. This increase in investment leads to higher demand for the euro, as investors need euros to buy European assets. As more money flows into the EU, the value of the euro can strengthen compared to other currencies. For example, if an American investor wants to buy European stocks, they will need to exchange U. S.
Detailed Explanation
When interest rates go up in the EU, it attracts investors. Other options are incorrect because This answer suggests that investors won't care about higher interest rates; This option implies that higher interest rates scare away investors.
Key Concepts
Interest Rates and Capital Flows
Currency Demand Dynamics
Global Financial Markets
Topic
Capital Flows and Currency Value
Difficulty
easy level question
Cognitive Level
understand
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