European Demand For U.s. Government Bonds

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Multiple Choice Section 1) B – European demand for U.S. government bonds 2) D – No, if one currency appreciates, the other must depreciate. 3) A – Devaluation 4) A – Appreciated 5) C- Increase aggregate demand in Japan 6) A – An increase in U.S. imports 7) C – Aggregate demand shifts inward 8) B – Lower interest rates 9) C – Foreign capital will be attracted to the United States and the dollar with appreciate. 10) D – Inflows and exchange rate appreciation Open Ended Question 1) • Concerns about the safety/stability of foreign assets relative to the United States. People want to invest and save their money in a currency that is not in danger of becoming worthless (like Germany’s after World War I ) • Foreign economic boom and there is a greater desire for American imports. The exchange rate will increase because foreigners will need to purchase American good’s with dollars (increasing value of our currency) • Increase interest rates of dollars will increase foreign demand for dollars. Exchange rate of U.S. dollar increases compared to foreign currency (dollar can buy more thus appreciating the currency) Question 2) A) The euro would appreciate. If one currency appreciates, the other must depreciate. Since Germany is investing less in the dollar, they inversely will be appreciating the Euro by more heavily relying on that currency. B) The euro will appreciate. With positive prospects for the future, investors will increase investment in euros. Since Americans
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