Part 1In March 2009, the Federal Reserve announced a quantitative easing program designed to lower intermediate and longer-term interest rates. What effect should this have on the dollar/euro exchange rate? A. The answer depends on the type of fiscal policy that the United States and the European Union implement. B. The dollar will appreciate against the euro because the supply of assets denominated in U.S. dollars will decrease. C. The euro will appreciate relative to the dollar because demand for assets denominated in U.S. dollars will fall. D. A quantitative easing program has no effect on the dollar/euro exchange rate.

Question

Part 1In March​ 2009, the Federal Reserve announced a quantitative easing program designed to lower intermediate and​ longer-term interest rates. What effect should this have on the​ dollar/euro exchange​ rate? A. The answer depends on the type of fiscal policy that the United States and the European Union implement. B. The dollar will appreciate against the euro because the supply of assets denominated in U.S. dollars will decrease. C. The euro will appreciate relative to the dollar because demand for assets denominated in U.S. dollars will fall. D. A quantitative easing program has no effect on the​ dollar/euro exchange rate.

BlackTom AI · Accepted Answer

Part 1: Read the question and all answer options carefully. The question asks about the effect of a Federal Reserve quantitative easing (QE) program on the dollar/euro exchange rate, which is an exchange-rate regime topic tied to currency flows and asset demand.

Option A: The answer depends on the type of fiscal policy that the United States and the European Union implement.
- Why this is unlikely: QE is a monetary policy tool, not fiscal policy. While fiscal policy can influence exchange rates, the question specifically describes a monetary action by the Fed. Saying the result depends on fiscal policy misses the direct mechanism of QE and misattributes the effect to fiscal choices. This makes the statement incorrect.

Option B: The dollar will appreciate against the euro because the supply of assets denominated in U.S. dollars will decrease.
- Why this is incorrect: QE involves the central bank purchasing assets, which typically increases the monetary base and tends to raise the money supply, not decrease it. Moreover, QE generally lowers long-term yields and can reduce the appeal of USD-denominated assets for some investors, leading to weaker demand for those assets and a weaker dollar, not a stronger one. The claim that the supply of USD-denominated assets will decrease is inconsistent with how QE operates and with the expected currency response. This makes this option wrong.

Option C: The euro will appreciate relative to the dollar because demand for assets denominated in U.S. dollars will fall.
- Why this is correct: QE expands the monetary base in the United States and tends to lower U.S. long-term interest rates. Lower yields on USD-denominated assets reduce their attractiveness to international investors relative to euro-denominated assets or other currencies. With demand for USD assets falling, capital outflows or reduced inflows into USD assets push the USD weaker and the EUR stronger, so the euro appreciates against the dollar. This aligns with standard open-economy macro theory on monetary expansion and exchange-rate movements.

Option D: A quantitative easing program has no effect on the dollar/euro exchange rate.
- Why this is incorrect: QE directly affects interest rate differentials and asset demand, which are central drivers of exchange rates in many models. Claiming no effect ignores the transmission mechanism through monetary expansion, asset prices, and capital flows that typically influences the dollar/euro rate. This makes the statement false.

Summary of reasoning across options: The core mechanism is that QE expands the U.S. money supply and tends to lower U.S. long-term interest rates, reducing demand for USD-denominated assets relative to other currencies. This tends to depress the dollar and lead to euro appreciation, not the opposite. The incorrect options either misidentify the policy type (fiscal vs. monetary), misstate the effect on asset supply or demand, or deny established transmission channels between monetary policy and exchange rates.

Homework:Chapter 20 Homework

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