Question

How each of the following changes will affect the nominal exchange rate (dollars per euro) according to the real exchange rate approach:

a.The relative demand of U.S. products decreases.

b.The relative demand of U.S. products decreases.

c.The US money supply increases

Answer 1

a. If the relative demand of U.S. products decrease, then the demand for U.S. dollar also decreases. This would cause the U.S. dollar to weaken.

b. If the relative demand of U.S. products increase, then the demand for U.S. dollar goes up, which causes the currency to appreciate. (a and b are the same?)

c. If the U.S. money supply increases, then the interest rates go down. This will make U.S. a less attractive country to invest in, which puts a downward pressure on the U.S. dollar, so it depreciates.

Can you please upvote? Thank You :-)