Question

How is the value of the dollar determined in the US? How is the value of the dollar determined on international markets (dollar appreciation or depreciation). How will the depreciation of the dollar impact the US economy? (look at the changes in the AD)

Answer 1

The value of the dollar is also determined like other commodities. Like other items depend on demand and supply. In the same way, when the dollar is printed by the government in large amounts and the liquidity in the market increases, then it will decrease the value of the dollar.The supply of dollars in the market also increases due to the government spending on programs such as providing basic facilities and running programs elsewhere. This also reduces the value of the dollar.

There are three ways to measure the value of the dollar. The first is how much the dollar will buy in foreign currencies. It's what the exchange rate measures. Forex traders on the foreign exchange market determine exchange rates. They take into account supply and demand, and then factor in their expectations for the future.

For this reason, the value of money fluctuates throughout the trading day. The second method is the value of Treasury notes. They can be converted easily into dollars through the secondary market for Treasurys.

The third way is through foreign exchange reserves. That is the amount of dollars held by foreign governments. The more they hold, the lower the supply. That makes U.S. money more valuable. If foreign governments were to sell all their dollar and Treasury holdings, the dollar would collapse. U.S. money would be worth a lot less.

A decrease in the value of the dollar will result in a decrease in the price of American goods, which will increase the export of American goods, Which will increase the GDP of America, while the balance of payments will decrease or the balance of payments will be unbalanced when imports become expensive.

Therefore, depreciation of the dollar will not only affect the US economy but also the global economy.