Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target. This leads people to expect that the European Central Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for U.S. assets to and the U.S. dollar will .A) increase; appreciate B) decrease; depreciateC) increase; depreciate D) decrease; appreciate

Contractionary measures involve increasing the rate at which the ECB lends to other banks who in turn lend to public for increasing production facility to increase GDP. If the rate in increased, borrowing becomes expensive and reduces money supply leading to lowering of inflation as inflation occurs when too much money chases too few goods.

Looking at and increased interest rates, the foreign investors would want to invest in Eurozone and therefore they will demand more EUR leading to an appreciation of ERU against USD or a depreciation of USD.

This eliminates options A and D. Now demand for European assets will increase and the money will be taken out from US assets so demand for US assets will decrease, therefore option C is correct.