1.If the Fed tells people that they will keep interest rates low for longer than expected previously, then:

a. Long-term interest rates will decrease now, because long-term interest rates reflect the average of future expected short-term rates.

b. Long-term interest rates will decrease in the future, when the Fed decreases the federal funds rate.

c. Long-term interest rates will still not change, because the Fed only affects the federal funds rate, which is short term.

d. Long-term rates will increase now, because long-term and short-term rates are inversely related.

2.If interest rates increase by 0.75% in the Euro area while they increase by 1.25% in the US, theory predicts that demand for euro assets will ___ and the euro will _____.

a. increase, appreciate

b. decrease, depreciate

c. increase, depreciate

d. decrease, appreciate