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Which of the following correctly explains how the dollars-per-euro exchange rate will change in the near future if the exchange rate is expected to rise?(1 point)

Responses

The expectation of an appreciating euro increases the supply of euros and decreases the demand for euros on the foreign exchange market. The result is a higher exchange rate in the near future.
The expectation of an appreciating euro increases the supply of euros and decreases the demand for euros on the foreign exchange market. The result is a higher exchange rate in the near future.

The expectation of an appreciating euro increases the demand for euros and decreases the supply of euros on the foreign exchange market. The result is a lower exchange rate in the near future.
The expectation of an appreciating euro increases the demand for euros and decreases the supply of euros on the foreign exchange market. The result is a lower exchange rate in the near future.

The expectation of an appreciating euro increases the supply of euros and decreases the demand for euros on the foreign exchange market. The result is a lower exchange rate in the near future.
The expectation of an appreciating euro increases the supply of euros and decreases the demand for euros on the foreign exchange market. The result is a lower exchange rate in the near future.

The expectation of an appreciating euro increases the demand for euros and decreases the supply of euros on the foreign exchange market. The result is a higher exchange rate in the near future.

1 answer

The correct explanation is:

The expectation of an appreciating euro increases the demand for euros and decreases the supply of euros on the foreign exchange market. The result is a higher exchange rate in the near future.

When traders expect the euro to appreciate, they are more likely to buy euros now in anticipation of this change, which increases the demand for euros. Additionally, if they hold onto their euros anticipating a rise, the effective supply of euros in the market decreases. This combination typically leads to a higher dollars-per-euro exchange rate.