Suppose Americans began purchasing real assets in Europe. How would this impact the foreign exchange market for the euro and the dollar price of the euro?

Question

Suppose Americans began purchasing real assets in Europe. How would this impact the foreign exchange market for the euro and the dollar price of the euro?

Demand for euro / Dollar price of euro

A	Decrease / Increase
B	Increase / Decrease
C	Increase / Increase
D	Decrease / Decrease
E	Decrease / Not Change

Answer 1

Hi Adidaz!

The correct answer should be B. Increase/Decrease.

When Americans buy European assets they have to exchange their U.S. dollars for Euros which increases the demand market for the euro as more are needed in the foreign exchange market. The dollar price of the euro would in turn decrease as the exchange rate between the two increases. As there are more euros, it will take less dollars to convert into euros than before. Please reach out to me if you have any other questions!