Question

Explain the relationships between currency fluctuations and balance of trade. Explain why a strong dollar makes foreign imports more attractive to US consumers. Explain how a weak dollar helps farmers, manufacturers, and other exporters in the US. Explain the relationship between interest rates and the value of the US dollar.

Answer 1

Strong dollar means you can buy more of the foreign currency using the same dollar which implies that imported goods are comparatively cheaper for U.S. consumers now which attracts imports.

Weak dollar helps exporters because it is relatively cheaper for foreign consumers to consume good from U.S. because they will have to pay less due to weak dollar.

We can deduce that imports are higher when currency is stronger and vice versa. Stronger the currency, lower the net exports (exports - imports).

Aggregate demand = Consumption + Investment + Government spending + Net Exports

Stronger currency means lower aggregate demand in an economy which means lower rate of interest while weaker currency make aggregate demand higher which means interest rate is higher.