Question

In each case below, does the U.S. exchange rate appreciate or depreciate, and what happens to...

In each case below, does the U.S. exchange rate appreciate or depreciate, and what happens to the net export of U.S.?

a. A drought in Russia destroys the wheat crop, resulting in increased purchases of wheat from the United States.

The U.S. exchange rate will _________________ and net export ______________.    

(Click to select)  depreciate; may increase, decrease, or stay unchanged  depreciate; will decrease  appreciate; will increase  appreciate; may increase, decrease, or stay unchanged  depreciate; will increase  appreciate; will decrease



b. Federal Reserve conducts expansionary monetary policy, thus decreasing interest rate in US.

The U.S. exchange rate will _________________ and net export ______________.

Business   Economics   
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Answer #1

(a) Appreciate, Increase

Higher Russian purchase of US wheat increases Russian demand for US dollar, appreciating US dollar. Also, higher exports will increase US net exports (= exports - imports).

(b) Depreciate, Increase

Lower US interest rate will decrease foreign investment in US, which will decrease the demand for US dollar, depreciating US dollar. Also, lower foreign investment will increase net capital outflow (= capital outflow - capital inflow), and since net capital outflow is equal to net exports, higher net capital outflow will increase net exports.

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