Question

1. Because of sanctions over their involvement in Ukraine in 2014, the Bank of Russia has raised its benchmark interest rate from 8% to 9.5%. What affect does this have on the exchange rate for the Russian Rubble versus the Euro?

2. After staying around 1.35 US dollars per Euro for years, the exchange rate fell below 1.25 US dollars to a euro during the summer of 2014. What affect does this have on tourism in Europe?

Answer 1

Part A

This would make investing in Russia increasingly alluring. To the degree that they can, Europeans would try to invest more in Russia. Obviously, the sanctions endeavor to restrain these extra investments yet they may not be perfectly implemented. This implies changing over more Euros for Rubbles and driving up the price of Rubbles. Moreover, this makes borrowing in Russia progressively expensive.

Part B

The demand for European vacations by Americans will increment since it takes fewer dollars to change over into a given number of euros. Similarly, Europeans considering going to the US currently need to change over more euros into dollars in the event that they wish to visit the US. Some will select to remain in Europe. The two impacts increase the demand for lodgings in Europe during vacations. Since the supply of hotels is generally fixed, this increments the hotel rates communicated in euros.