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Considering two economies with the euro exchange rate, if tariffs were imposed in one of the...

Considering two economies with the euro exchange rate, if tariffs were imposed in one of the countries, how will the euro exchange rate fluctuate?

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Question:

Answer:

Fist Country = USA

Second Coutry = France

Exchage rate (Euro/USD) = 1.7

Now suppose, the USA imposes tariff on the products that are importing from France. Now imposing tariff will increase price level in the USA due to there is a gap between demand and supply of goods in the US market. It will decrease supply of the USD in the foreign exchage market. It will appreciate the USD. Other side the demand of Euro will decrease due to decreasing export from France. Decreasing Demand of Euro will dereciate Euro in respect of USD.

Exchage rate (Euro/USD) = 1.2 (assuming for understanding only)

Here i will under stand it through demand and supply graph. here decreasing demand for Euro will shift demand curve left from D0 to D1 and Exchage rate (Euro/USD) will decrease or Euro will depreciate from E0 to E1.

Graph:

Thanks

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