The Fed and the ECB Expected to Head in Opposite Directions

Answer the following questions to check your understanding of the story.

1) If the ECB raises interest rates and the Fed lowers interest rates, how will the U.S. dollar/euro exchange rate change?

The U.S. dollar ____________.

a) will fall against the euro

b) and the euro will rise together

c) will rise against the euro

d) and the euro will fall together

2) What is a bond yield?

Bond yield is the ____________.

a) fixed interest payment a bond makes to its buyer divided by the bond’s market price

b) nominal interest rate on a bond multiplied by its face value

c) fixed interest payment a bond makes to its buyer divided by its face value

d) fixed interest payment a bond makes to its buyer

3) Why have bond yields risen in Europe?

Bond yields have risen in Europe because ____________.

a) the demand decreased while supply remained unchanged, lowering price and lowering yields

b) the supply decreased while demand stayed unchanged, raising price and raising yields

c) the demand increased, raising price and raising yield

d) the supply of bonds increased, lowering price and raising yield

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