Question

Suppose it is discovered that drinking French wine dramatically reduces the risk of heart attacks. What will happen to the U.S. exchange rate for Euros? That is, will the U.S. dollar appreciate or depreciate versus the Euro? Explain.

Answer 1

Answer - If the French wine is considered good for the health of heart , its demand will increase. The increased demand for french wine implies that in order to purchase this increased quantity , more Euros will be required. Thus the demand for Euros will increase. As the demand curve for Euro will shift right , the exchange rate will increase. This implies that now more US dollars will be needed for 1 Euro. Hence due to this increased demand for Euro against dollar , Dollar will depreciate and Euro will appreciate.