Question

1. What is the notation used in the textbook to represent dollar's exchange rate against euro?
2. If dollar appreciates against euro from yesterday to today, does this mean the exchange rate gets bigger or smaller using the notation you get from #1? Why?
3. If dollar depreciates against euro, will this make American goods more expensive or less expensive to Eurozone buyers? Why?
4. How does fixed exchange rate differ from floating exchange rate?
5. How does currency union differ from dollarization?

Answer 1

Look for the insights shared by me, shown in orange color text:

1. What is the notation used in the textbook to represent dollar's exchange rate against euro? Unaware of how exactly your textbook presented that, genrally exchange rate is represented as below (it's an example):
   
   If 100 Euros can buy 120 US Dollar, we can write the notation in any of the following ways:
   
   
   $ 1 = € 0.833 ^{(to me, this one seems to be most close to how it might have shown in your text book)}
   € 1 = $ 1.20
   € 1 : $ 1.20
   $ 1 : € 0.833
   
2. If dollar appreciates against euro from yesterday to today, does this mean the exchange rate gets bigger or smaller using the notation you get from #1? Why?
   
   If dollar appreciates, say from [€ 1 = $ 1.20] to [€ 1 = $ 1.10]. it indicates INCREASE the purchasing power of $).
   
   Now, dollar's exchange rate against euro will be : $ 1 = € 0.909
   
   As we can see, exchange rate has become bigger (if shown in this way).
   
   (Why? Because now, after change, we can buy more Euros for each Dollar.)
   
   
   However, alternatively, if we have been showing the same thing in the following way:
   From [€ 1 = $ 1.20] to [€ 1 = $ 1.10]
   then exchange rate has become smaller you see.
   It's just a matter of presentation. Both ways, we mean the same thing.
   
   
3. If dollar depreciates against euro, will this make American goods more expensive or less expensive to Eurozone buyers? Why?
   
   When dollar depreciates against euro (say, from $ 1 = € 0.833 to $ 1 = € 0.769 OR ALTERNATIVLEY WRITTEN AS From € 1 = $ 1.20 to € 1 = $ 1.30) , definitely American goods will become less expensive to Eurozone buyers, because now Eurozone buyers can buy goods worth more dollars for each euro spent by them.
   
   
4. How does fixed exchange rate differ from floating exchange rate?
   
   For this, if we understand the two concepts well, difference between the two will come to our minds easily. Let us have those one after another:
   

   a) Fixed Exchange Rate System (also called ‘Pegged Exchange Rate System’ or ‘Parity Value System’): Its features are:

   i) In this system the exchange rate of domestic currency is fixed by the government.

   ii) The value of domestic currency is tied (numerically fixed) to the value of gold, silver or even the currency of another country. This is known as ‘pegging’. This system is also called ‘parity value system’.
   

   b) Flexible Exchange Rate System (also called ‘Floating Exchange Rate System’ and ‘Free Exchange Rate System’):

   In flexible exchange rate system, the exchange rate is determined by the free market forces (i.e. demand and supply of the currencies in international foreign exchange markets). Its features are as follows:

   i) Forex rates are determined by demand and supply.

   ii) Government does not play any official role in exchange rate determination.

   iii) This system is also called ‘floating exchange rate’.

   iv) Exchange rate under this system keeps on fluctuating every moment.

5. How does currency union differ from dollarization?
   
   The difference between Currency Union and Dollarization is that Dollarization is a type of fixed exchange rate system where the exchange rate of a non-dollar currency is pre-set against the value of dollar.
   
   Currency Union, on the other hand, takes place when two or more countries share a common currency or even decide in unison to peg (small adjustments only) their exchange rates to the same common currency in order to keep the value of their individual currency similar. One of the prime goals of forming a currency union is to coordinate the economic activity and monetary policy too across member countries.