An increase in the value of the dollar relative to all foreign currencies means the pric...

An increase in the value of the dollar relative to all foreign currencies means the pric of foreign goods purchased by the dollar ___.

		A)increases
		B)falls
		C)remains unchanged

Expert Solution

The Correct answer is B - Falls

When value of dollar appreciates as compared to other foreign currenices it results in cheaper prices of foreign goods that can be purchased using dollars.

Let us understand the above statement using an example

Suppose a U.S Citizen wants to buy a laptop from India. On 1.9.2018 he enquires about the laptop from an Indian Seller who quotes him Rs.65,000 (which is $1000) considering the exchange rate to be 1 USD = Rs.65. Now the customer decides to purchase the laptop after a week. On 8.9.2018 the exchange rate has risen to 1 USD = Rs.70 but the seller has not changed his price of Rs.65000.

Note - Rising of USD from Rs.65 to Rs.70 signifies that value of dollar has appreciated and value of ruppee has depreciated.

The US citizen will now be required to pay only 65000/70 =$928.57 as compared to $1000 which he had to pay when the exchange rate was 1 USD = Rs.65.

Therefore savings due to appreciation in the value of dollar = $1000 - $928.57

= $71.43

Thus it can be concluded from the example above that an increase in the value of the dollar relative to all foreign currencies means the price of foreign goods purchased by the dollar falls.

jeff jeffy answered 2 years ago

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