If the euro depreciates against the U.S. dollar, can a dollar buy more or fewer euros...

If the euro depreciates against the U.S. dollar, can a dollar buy more or fewer euros as a result? Explain.

I know the answer and how to explain it pretty well:

Basically as the currencies change in relation to one another, the purchasing power of dollar increases against euro. Therefore, the dollar gets more valuable against the euro. This means a dollar can buy more euros after depreciation of euro against it.

My issue is that the post has to be 250 words, so I need it explained in a lot greater detail.

Solutions

Expert Solution

Generally, the relation between two currencies can be expressed as an exchange rate. Therefore, exchange rate is price of one currency in relation to another currency. There are two types of quotes for an exchange rate. They are direct quote and indirect quote. Direct quote is when foreign currency’s value expressed in domestic currency. Indirect quote is nothing but the other way round. It is the domestic currency being expressed in foreign currency. In our question, it is asked that when Euro value depreciates against US Dollar, can a dollar buy more or fewer Euros. Let us take current exchange rate between Euro and US dollar which is 1 Euro = 1.13 US Dollars. It is direct quote from US perspective. It means that one Euro can purchase 1.13 US Dollars. As the question asks on the other side of the transaction, let us take the opposite view. How many Euros can a dollar buy? The indirect quote would be 1 US Dollar=1/1.13 Euros. It equals to 1 US Dollar = 0.8850 Euros. Now let us take an example of Euro value getting depreciating, which means that now the purchasing power of Euro is decreased. The depreciation of a currency has the effect of increasing the value of the other currency having an exchange value with it. It means that, now that Euro’s currency has depreciated, it can buy less US Dollars than before. For example, let us take that 1 Euro = 1.10 US Dollars instead of 1.13 US Dollars. So, in this example, one Euro can buy only 1.10 US Dollars. Then, when we take indirect quote, 1 US Dollar can buy 1/1.10 Euros. That equals 0.9091 Euros. So, it is now obvious that when Euro gets depreciated against Dollar, a dollar can purchase more Euros.

jeff jeffy answered 1 year ago

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