1. The dollar _______ against the euro when the European central bank lowers interest rates.

2. If the dollar appreciates against the euro, then the euro also _______ against the dollar.

3. The dollar _______ against the euro when the inflation rate in the United States increases.

4. A shift in the demand for Euros and away from dollars will_______ the dollar against the euro.

5. Using Demand and Supply Analysis. Draw a demand and supply graph for British pounds to determine the effects of the following on the exchange rate between the British pound and the Japanese yen. (The vertical axis will be yen per pound.)

a. An increase in Japanese interest rates

b. An increase in the price of British goods

c. An increase in British interest rates

6. The Effects of Policy Changes in Japan. Until the early 1980s, Japan required its large insurance companies to invest all of their vast holdings in Japanese securities. At the prompting of the United States, Japan relaxed the restrictions and allowed the companies to invest anywhere in the world. What effect do you think this had on the yen/dollar exchange rate and the trade balance between the two countries?

7. Exchange Rates and Rumors of Default on Government Debt. Suppose there are rumors that a country undergoing financial difficulties is planning to default on its debt. Explain what you think will happen to that country s exchange rate.