Given a floating exchange rate system, an increase in ____ would cause the dollar to appreciate against the euro.
A) U.S. labor costs
B) the U.S. money supply
C) U.S. prices of goods
D) U.S. real interest rates

Question

Quizplus · Accepted Answer

An increase in U.S. real interest rates would cause an increase in demand for dollars as investors seek to earn higher returns on their investments. This increase in demand for dollars would cause the dollar to appreciate against the euro. Increases in U.S. labor costs or U.S. prices of goods might make U.S. goods more expensive and less competitive in international markets, which could lead to a depreciation of the dollar. An increase in the U.S. money supply might lead to inflation, which could also cause a depreciation of the dollar.

Given a Floating Exchange Rate System, an Increase in ____