An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale. a. increase; reduce b. increase; increase c. reduce; reduce d. reduce; increase
An increase in U.S. interest rates relative to German interest rates would likely decrease the U.S. demand for euros and increase the supply of euros for sale
Explanation:
An increase in U.S. interest rates relative to German interest rates would make U.S investments more attractive.
This will increase the demand for U.S bonds: to buy them, investors have to acquire dollars. Then, in this case, it is more convenient to exchange euros to dollars to be able to buy US bonds, which have a higher yield (because they pay more interest than German ones). This implies than dollar's demand will increase and euro's supply will decrease.
