(Answered) 1 – 8. (2 points each; 16 points total) These questions ask you to consider different factors which…

➤ Why does higher inflation in the Eurozone cause currency depreciation?
Higher inflation lowers the euro’s purchasing power and shrinks real interest rates if nominal rates do not rise equally. Investors then seek higher real returns abroad, prompting capital outflows and reduced demand for euros. Under purchasing-power parity, weaker goods competitiveness further pressures the euro downward.