Question

IN NEED OF A DETAILED ANSWER!!

Question 1- Learning to draw and label the graphs correctly and then explaining the changes in the economy is key to scoring high on this question.

Scenario 1

The United States economy is growing at a faster rate than any of its trading partners. As a result, inflation is increasing.

Show and explain how the increase in inflation will affect the international value of the United States dollar and the foreign dollar. (Make sure you use the concepts of supply and demand and the cost of domestic goods in your explanation.)

Explain how the changing value of the dollar will affect United States exports and imports. (Make sure you use the concepts of the cost of foreign and domestic goods in your explanation.)

Answer 1

Due to inflation domestic prices of goods produced in USA increases. As it happens foreign demand for USA exports will fall because they are now more costly. The Foreigners purchase usa goods by paying in dollars. This means demand for dollars will fall. As a result demand for dollars shift from D to D0. The result is dollar depreciates and exchange rate of euro(e. g) per dollar falls from 4 euros per dollar to only 3 euros per dollar. Foreigners holding usa dollars will also experience depreciation. But foreign currencies like Canadian dollar will appreciate

As dollar depreciates demand for domestic US will increase because they are now less costly. e.g if coca cola costed 4 euros earlier it will cost only 3 euros now and thus demand increases. On the other hand usa imports will become costly because more dollars are needed now to purchase same imports. The imports become costly and demand for them will fall