Response to the following problem:
Impact of Economy on Exchange Rates
Assume that inflation is zero in the United States and in Europe and will remain at zero. United States interest rates are presently the same as in Europe. Assume that the economic growth for the United States is presently similar to Europe.
Assume that international capital flows are much larger than international trade flows. Today, there is news that clearly signals economic conditions in Europe will be weakening in the future, while economic conditions in the United States will remain the same.
Explain why and how (which direction) the euro's value would change today based on this information.