Question

assume quotes are based on units of foreign currency per dollar and the us dollar appreciated against the euro today. this means that :
a. the exchange rate between the dollar and the euro weakened
b. the us interest rate is less than the interest rate in euroland
c. the us inflation rate exceeds the inflation rate in euroland
d. it now takes more dollars to buy one euro
e. it now takes more euros to buy one dollar

Answer 1

Exchange rate means the number of foreign currencies one unit of base currency can buy.

Quotes are based on units of foreign currency per dollar and the US dollar appreciated against the euro today, this means that: e. it takes more euros to buy one dollar. An appreciation of a currency means it will take more of foreign currency to buy that currency. Here, since US dollar appreciated it means it will now take more of Euros to buy 1 US dollar of currency.

All the other options are incorrect.

Option a. is incorrect because an appreciation of US dollar currency against Eurodollar here means the exchange rate between the dollar and euro strengthened. This is because US dollar is the base currency as the other currencies are quoted against US dollar in an international market.

Option b. is incorrect because an appreciation in US dollars could mean that US interest rates are more than the interest rates in Euroland.

Option c. is incorrect because an appreciation in US dollars could happen because inflation rates in US were lower than the inflation rate in Euroland. The exchange rates try to maintain an equilibrium with the inflation rates of the two countries. Whenever, there is a difference in inflation rates between the two currencies, say if inflation rate in US dollar is more than that in Euroland. This will disturb the equilibrium between the two currencies, since now goods available in one country are cheaper than the goods in other country. So this will result in increasing the import of goods of country where available cheaper to the country where they are costlier. This will cause an increase in demand for currency with lower inflation, and ultimately causing its currency to appreciate or increase in value as against the other currency in the exchange rate.

Option d. is incorrect because an appreciation in US dollars means it takes more euros to buy one dollar.

Option e. is Correct because an appreciation in US dollars means it now takes more euros to buy one dollar.