CHAPTER TWELVE: ANSWERS TO REVIEW QUESTIONS AND PROBLEMS 1. If economic growth increased in the EMU but not in the United States, the EMU would demand more U.S. exports and supply more euros to the United States, and this would lead to a reduction in the dollar/euro exchange rate (appreciation of the dollar). 2. If the price level increased in the United States less than in the EMU, the United States would find imports from the EMU more expensive while the EMU would find U.S. exports cheaper. This will reduce the U.S. demand for euros (the U.S. demand curve for euros shifts down and to the left) but increase the U.S. supply of euros (the U.S. supply curve for euros shifts down and to the right). Both of these effects would lead to a reduction in the dollar/euro exchange rate (dollar appreciation). 3. If the interest rate increased in the United States but remained unchanged in the European Monetary Union (EMU), both the United States and the EMU would demand fewer euros. This would reduce the U.S. demand and increase the U.S. supply of euros and lead to a decline in the dollar/euro exchange rate (the dollar to appreciate). 4. If the expectation suddenly arises that the dollar will appreciate, U.S. and EMU investors would buy dollars with euros, now that the dollar is cheap in the anticipation of selling dollars for euros (and thus earn a profit) after the dollar appreciates. This would reduce the U.S. demand and increase the U.S. supply of euros, both or which cause a decrease in the dollar/euro exchange rate (an appreciation of the dollar)