Question

In recent years the U.S. dollar has weakened against the Euro in the foreign exchange market.

a) Explain how this effects trade between the two countries.

b) Explain how such a situation can have a positive effect on the U.S. economy.

Answer 1

A weak US dollar against the Euro means a euro will now buy more dollars.

A) A weak dollar against the Euro will mean US made goods will appear cheaper in European markets while European made goods will be expensive to US consumers

This means US imports will reduce while US exports will increase.

This will increase US net exports or trade balance and reduce US trade deficit

European trade balance would worsen and trade deficit would increase

B) A weak dollar will have a positive impact on US economy because not only will US trade balance improve but investment in US based companies will also improve because of weak dollar.

Investors will increase investment in US based and benefit from export income. This will increase job opportunities in the US economy as well.

This makes it a positive impact on the US economy.