Question

If the rate of return on financial assets within the European Union have an average return of 5% while similar financial assets in American have a rate of return of 2%, then the demand of euros will __________ and the supply for euros will __________.

Answer 1

The decrease in U.S. interest rates compared to Europe will lead to a decrease in the demand for dollars and an increase in the supply of dollars in foreign currency markets.

Step-by-step explanation:

The decrease in U.S. interest rates compared to Europe will lead to a decrease in the demand for dollars and an increase in the supply of dollars in foreign currency markets. This is because lower interest rates make U.S. assets less attractive compared to assets in the European Union. As a result, the demand for euros will increase while the supply of euros will decrease.