Question

This is our last discussion of the quarter, it's about the Currency Exchange and its effects on the macroeconomics:

1) Compared to Three (3) other currencies such as Canadian, Euro, China, and Japan (or other currencies you have interest in), please find out if the US Dollar currency has appreciated or depreciated since one year ago?

2) What are the effects of the appreciated/depreciated US dollar to the economy of the United States? State two positive effects and two negative effects.

Answer 1

1. In the past 1 year performance of USD in comparision to other currencies is presented below.

Canadian (CAD). USD has appreciated against CAD. One year before 1CAD = 0.74 USD but now 1CAD = 0.73USD.

Euro (EUR). USD has depreciated against EUR. One year before 1EUR = 1.12 USD but now 1EUR = 1.13USD.

Yen (YEN).  USD has depreciated against YEN. One year before 1YEN = 0.0092 USD but now 1YEN = 0.0093USD.

2. Effects of appreciated dollar on US economy.

Positive effects -

a. It will increase buying power of USD thereby reducing the import bill.

b. It reduces the ability of central banks to increase interest rates or they need to cut interest rate, as high interest rate will lead to more capital inflow which will result in further appreciation of dollar. As central bank will not be able to increase interest rate or will cut interest rate this will provide boost to economic output.

Negative effects-

a. Due to appreciation of local currency exports will become costly and less competitive.

b. As central banks will not be able to cut interest rate, this may lead to increase in inflation.

3. Effects of depreciated dollar-

Positive Effects-

a. Increase in exports due to lower currency value.

b. Higher profits for US companies operating abroad as they will be able to convert their foreign exchnage into more dollars.

Negative Effects-

a. High import bill as US needs to pay more dollars for importing goods.

b. Increase in inflation as imported goods value will rise therefore it will lead to high inflation.

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