Question

Each of the following, tell how it shifts demand and/or suppply of Euros on foreign exchange markets.

A. US investors want to diversify by buying more Euopean stocks and bonds.

B. US cars become more popular in Euope, so Europeans buy more US Cars.

C. Because of a rise in US interest rates, both US and European Investors want to buy more US bonds and fewer European bonds

D. Because of a fall in US Interest rates, both US investors and European Investors want to buy fewer US Bonds and more European Bonds.

Answer 1

Answers:

A. U.S. investors will want to invest in Euro stocks and bond because they will believe that eurs will appreciate in future. This expectation about future rise in euro will make lead to increase in demand of euro hence shifting the demand curve towards the right. While the currency appreciation will not allow those holding the stocks and bond to part awway hence make the supply stringent. Thus making the supply curve to shift to left.

B. The reason the U.S. cars will be more popular in Europe is that it is more cheaper. So the cars in Europe are expensive then that imported from U.S. This will decrease the demand of Euro on foreign exchange market and increase the supply of it. Due to decrease in demand the demand curve will shift to left and due to increase in supply curve the supply curve will move to right.

C. As there is rise in U.S. interest rate, the rate of return from U.S. bonds will be higher. Hence the investors in the two country will be intersted in buying the U.S. bonds more. This will increase the demand of U.S. dollars in comparsion to Euro, hence the demand of Euro will decrease to left.

D. Due to fall in interest rate, U.S. bonds will no more be a profitable investment for investors. They will be keen in investing European market where rate of return is high. This will increase the demand of Euro currency on forgien exchange market towards right.