4. Illustrate how each of the following affects the price and quantity of euro (€) in...

4. Illustrate how each of the following affects the price and quantity of euro (€) in the U.S. using an exchange rate supply and demand diagram. Assume that the exchange rate in terms of US dollars per euro, and that the currency regime is floating. Identify if the euro is appreciating or depreciating.

a. BMW (a German –manufactured automobile) sales in the US decline.

b. More Germans go to the US during the holidays.

c. U.S. interest rates increase and American investors decide to forego investing euro-denominated assets in favor of investing in the United States.

Expert Solution

4.

a. BMW (a German –manufactured automobile) sales in the US decline: It implies that there will be a less demand for Euro in the US economy. This means that value of Euro decreases that is Euro is depreciating.

Fall in demand for Euro cause DD curve to shift left as DD'. Now the new equilibrium is E' where new decreased exchange rate is E1 and new Decreased Equilibrium quantity of Euro is Q1.

b. More Germans go to the US during the holidays: It implies that more Euro will supplied to the US. So due to rise in supply of Euro the value of Euro in US decreases that is Euro is depreciating.

Rise in supply of Euro Cause SS curve to shift right as SS'. Now the new equilibrium is E' where new decreased exchange rate is E1 and new increased Equilibrium quantity of Euro is Q1.

c. U.S. interest rates increase and American investors decide to forego investing euro-denominated assets in favor of investing in the United States:

It implies that there will be a less demand for Euro in the US economy. This means that value of Euro decreases that is Euro is depreciating.

Fall in demand for Euro cause DD curve to shift left as DD'. Now the new equilibrium is E' where new decreased exchange rate is E1 and new Decreased Equilibrium quantity of Euro is Q1.

Rahul Sunny answered 1 year ago

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