Question

If the Euro/dollar exchange rate shifts from 1.25Euros/$ to 1.00Euros/$ what will happen

to the imports of fine wine into the U.S. and the exports of American racing bicycles to Europe? Explain

Answer 1

If the euro/dollar Exhange rate shifts from 1.25 Euros/$ to 1.00Euros/$. This means that the euro has appreciated in relation to the US dollar. Import of wine into the US Decreases because for US citizens the wine made in Europe has become more expensive since Euro appreciated. Moreover, since euro appreciated in relation to US dollar, it means that for European Residents US goods have become more cheaper. So, Europeans will demand more of Americal Racing bicycles. Hence, Exports of American racing bicycles to Europe would increase.