Impact of Economy on Exchange Rates Assume that inflation is zero in the United States and in Europe and will remain at zero. U.S. interest rates are presently the same as in Europe. Assume that economic growth in the United States is presently similar to that occurring in Europe. Assume that international capital flows are much larger than international trade flows. Today, news reports clearly signal that economic conditions in Europe will weaken in the future, whereas economic conditions in the United States will be steady. Explain why and how (which direction) the euro’s value would change today based on this information.
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