Question

Explain what happens to the value of the dollar relative to the euro as the result...

Explain what happens to the value of the dollar relative to the euro as the result of higher inflation in Germany compared to the United States. You may want to work the correct shifts of the supply and demand curves before you try and explain the results.

Homework Answers

Answer #1

Answer

A higher inflation rate in the Germany compared to United States will tend to increase the value of the Dollar because:

  • High inflation in the Germany means that Germany goods increase in price quicker than American goods. Therefore Germany goods become less competitive. Demand for Germany exports will fall, and therefore there will be less demand for Euro.
  • Also, Germany consumers will find it more attractive to buy American goods. Therefore they will supply Euros to be able to buy Dollars and Dollar imports. This increase in the supply of Euros decreases the value of Euros.


Increase in supply of Euros and fall in demand leads to lower value of the Euro against the Dollar.

Therefore, in the long run, changes in relative inflation rates should lead to a change in the exchange rates.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Over the last 10​ years, the dollar has depreciated sharply​ vis-à-vis the euro. Suppose that in...
Over the last 10​ years, the dollar has depreciated sharply​ vis-à-vis the euro. Suppose that in the short run the Fed wanted both to defend the dollar​ (that is, stop its decline​ and/or cause it to​ appreciate) and stimulate investment. Can it achieve both of these goals simultaneously through monetary​ policy?   A. ​Yes, to stimulate investment the Fed will use expansionary policy that will raise interest rates. The higher interest rates will reduce investment into the United​ States, which will...
Right now, the US dollar is relatively close in value to the euro ($1.10 = 1...
Right now, the US dollar is relatively close in value to the euro ($1.10 = 1 e). There is some speculation that we may be seeing some inflation in the United States in the near future. If the rate of inflation stays the same in the European Union and increases in the US, what can we expect will happen to the exchange rate between the Euro and the US dollar? Moreover, suppose that central banks neither in the United States...
If the value of the US dollar increases relative to other currencies (exchange rate increases), what...
If the value of the US dollar increases relative to other currencies (exchange rate increases), what will be the effect on net exports for the United States?
Explain the probable result of the following events on the currency exchange rates below (assume all...
Explain the probable result of the following events on the currency exchange rates below (assume all other factors stay constant). A popular movie released in the United States, but set in Spain significantly increases the number of U.S. tourists visiting Spain.     The euro will   (Click to select)   stay constant   appreciate   depreciate  relative to the U.S. dollar. The Federal Reserve undertakes expansionary monetary policy by cutting interest rates.     The U.S. dollar will   (Click to select)   stay constant   depreciate   appreciate  relative to other foreign currencies. A destructive typhoon in the Philippines increases...
1. When interest rates in Australia decrease relative to interest rates in other countries, we may...
1. When interest rates in Australia decrease relative to interest rates in other countries, we may see Australian dollar Select one: a. depreciation and a decrease in net exports. b. appreciation and an increase in net exports. c. appreciation and a decrease in net exports. d. depreciation and an increase in net exports. 2. We can expect an increase in the value (appreciation) of the Australian dollar relative to Indian rupiah when Select one: a. Indian economy is going into...
1. When the U.S. dollar depreciates relative to other major currencies, what would happen to exports...
1. When the U.S. dollar depreciates relative to other major currencies, what would happen to exports and imports of goods and services from and to the United States? Is it good for domestic firms exporting goods and services? Is it good for domestic portfolio investors who may purchase foreign assets? 2. When the Federal Reserve conducts an expansionary monetary policy (increasing its monetary base), what would happen to the domestic money supply? Does this also affect the supply of dollar...
Define what the Forex is? Explain how is the Forex impacted by the global balance of...
Define what the Forex is? Explain how is the Forex impacted by the global balance of payments for each country? The textbook identifies 4 items that determine the price of a currency, describe why these 4 factors affect a currencies price. Below are 4 statements: Please identify the outcome for the exchange rate of the currency based on the statement (1) A rise in the EU interest rate relative to interest rates abroad (Euro). (2) Rising US inflation 2% to...
1. Suppose that as a result of the government policy we expect a permanent decrease in...
1. Suppose that as a result of the government policy we expect a permanent decrease in the flow of migrant workers into the United States. As a result, we can expect Select one: a. a right-ward shift in the short-run aggregate supply curve b. a right-ward shift in the aggregate demand curve c. a left-ward shift in the long-run aggregate supply curve d. this will not have any effect on the US economy in the short or long run 2....
Suppose you are a currency speculator trying to forecast what will happen to the value of...
Suppose you are a currency speculator trying to forecast what will happen to the value of the dollar over the next year. Suppose all of our usual theories hold (uncovered, covered and real interest rate parities, absolute and relative purchasing power parities, as well as the Fisher effect for nominal interest rates). For each of the separate cases below, use the information in that case to compute the expected depreciation of the dollar, or state if there is not enough...
1. What does it mean to have a current account deficit? Explain in terms of net...
1. What does it mean to have a current account deficit? Explain in terms of net foreign assets, absorption, and the capital and financial accounts. 2. In a previous question, you considered a trade in automobiles between the United States and Europe. Like that example, a dollar depreciation results in a "dip" of net import before a favorable trade balance. This "dip" is counter-intuitive because the dollar depreciation should make the exports from the U.S. cheaper and the imports to...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT