QUESTION1 Suppose the rate of interest in Belgium (the home country) is lower th

Question

QUESTION1 Suppose the rate of interest in Belgium (the home country) is lower than the rate of interest in Canada. Other things being equal, this will a. Decrease the demand for the euro b. Decrease the quantity demanded for the euro. c.Increase the demand for the euro. o d. Increase the quantity demanded for the euro. QUESTION2 Assume that Japan and the United Staes are engaged in a system of flexible exchange rates. Supplyyen -0.30 Demandyen Quantity of Yen Refer to the above graph. If more Japanese decide to visit the United States for their vacation:s: O The yen will appreciate and the U.S. dollar will depreciate O The yen will depreciate and the U.S. dollar will appreciate O The yen and the U.S. dollar will appreciate The yen and the U.S. dollar will depreciate

Explanation / Answer

1

Since the Belgium currency is euro and Canada currency is Dollar.

So if the rate of interest is lower in the Belgium which is a home country compare to the rate of interest of the Canada.

Therefore there will be an infinite outflow of capital from Belgium to Canada in search of the high rate of interest.

Therefore the demand for the Canada dollar increases and demand for Belgium Euro decrease.

Hence option a is the correct answer.

2.

Since now more Japanese visits to the United States for their vacations, therefore the demand for dollar increase compare to Japan Yen. This is because if more Japanese are staying in the United States then they need a dollar for spending and so they will convert Yen with the dollar. Therefore the dollar will appreciate and Yen will depreciate because the demand for Dollar has increased.

Hence the correct answer will be option second.

Yen will depreciate and the dollar will appreciate.

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