Question

which of the below will result in devaluation of euro ?

α. reduction of deficit at the commercial balance of eurozone

b. Increase of interest rate in Eurozone

c. Decrease of interest rate in USA

d. Decrease of inflation in Eurozone

e. None of the above

Answer 1

a) Option A is incorrect as deficit of balance of trade have fallen where balance of trade is Exports - Imports. Deficit occurs when Imports > Exports. As deficit have reduced, Exports must have increased while imports fall. As Exports rises, cuurency of eurozone appreciates against other currencies.

b) Option B is incorrect because a rise in interest rate in Eurozone will induce investors from aborad to deposit their money in Eurozone such that they can earn comparatively more return. Inflow of money will appreciate Euro against other currencies.

c) Option C is correct because fall in interest rate of Euro will induce investors to withdraw money from Eurozone and invest them in any other country such that they can earn comparatively more return. Outflow of money will depreciate Euro.

d) Decrease of Inflation in Eurozone will raise their exports because foreign consumers will find it cheaper to consume goods from Eurozone now. Rise in exports will appreciate Euro against other currencies.