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Inflation in the US

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Do the following events cause the dollar to appreciate or depreciate against the Euro?

1. Health experts discover that red wine, espacially French or Italian red wine, lowers cholesterol.
2. GDP falls in nations across Europe.
3. The United States experiences a higher inflation rate than does Europe.
4. The United States runs a large budget deficit.
5. The U.S. dollar is expected to depreciate.

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Solution Summary

The expert compares the inflation in the US to Europe.

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1. This will cause the dollar to depreciate against the Euro. This is because there will be an increase in demand for the wine. This causes an increase in demand for Euros to pay for increasing imports of wine and thus this demand for euro will cause it to appreciate while there will be lower demand for dollars, causing it to depreciate.

2. A fall in GDP in Europe will cause the dollar to appreciate against the Euro. This is because the economy will no longer be able to support a strong economy and it is also likely that they will attempt to devalue the curerency in order to make their ...

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