In February 2020, the US dollar was trading on the foreign exchange market at 0.88 euros...

In February 2020, the US dollar was trading on the foreign exchange market at 0.88 euros per US dollar, and today the US dollar is trading at 0.83 euros per US dollar.

how will trading between the two countries be effected?

Solutions

Expert Solution

Answer :

Initially the foreign exchange market shows the rate to be 0.88 euros per US dollar. Now the exhange rate is 0.83 euros per US dollar.

This fall in exchange rate implies that the currency of US has depreciated with respect to euro. Initially 1 US dollar was able to buy 0.88 of euros but now it is able to buy 0.83 of euros. Therefore a fall in the value for US dollar with respect to euro. This would imply that imports have become costlier for the US economy since 1 US dollar is now able to buy less of euros. So a fall in imports is to be expected along with a rise in exports since now the other side of the coin is that euro is able to buy more of dollars now, so importing for their currency has become cheaper. Thereby their increase in imports in their economy would imply higher exports for the US economy.

So the effective result due to this change in exchange rate would mean (between the two countries) :

US imports decline, also increase in exports for US and vice versa for the other country.

Rahul Sunny answered 1 year ago

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