AP Macroeconomics Question 463: Answer and Explanation
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11. U.S. dollars and the European Union's (EU's) euro are exchanged in global currency markets. Which of the following is true?
- A. If inflation is high in the EU and the price level in the United States is stable, the value of the dollar appreciates.
- B. If the Fed decreases the money supply, the value of the dollar depreciates.
- C. If EU consumers are less inclined to purchase American goods, the dollar appreciates.
- D. If U.S. income levels are rising relative to incomes in the EU, the euro depreciates.
- E. If the European central bank expands the money supply, the euro appreciates.
Correct Answer: A
A-A difference in relative prices affects the exchange rate between the dollar and the euro. European customers will see U.S. goods as relatively less expensive and increase their purchases from the United States, thus appreciating the dollar and depreciating the euro.