Worksheet 4 (1 problem)

Worksheet 4: Exchange Rate Determination

Problem:What will happen to the value of euro (vs. the currency of its major trading partner U.S.), if the euro zone real interest rate has gone up substantially, while the U.S. Federal Reserve has decided to keep its benchmark rate unchanged. Assuming there are only two countries, the European Union and the U.S., in your ceteris paribus analysis. Show detailed analysis of the impact of this scenario using supply / demand curve shifts to demonstrate changing equilibrium points, supplement with a short-essay description, and conclude with ending results - appreciation and / or depreciation - of the U.S. dollar and the euro.