Question

3) The exchange rate between the dollar and the euro is $1.30/€. a) A good that costs 100 euros in France sells for how much in the U.S.? b) A good that costs 100 dollars in the U.S. sells for how much in France? c) Suppose that the exchange rate changes to $1.35/ €. Which currency has appreciated? d) Which currency has depreciated? e) What is the new cost in the U.S. of a French good that sells for 100 euros in France? f) What is the new cost in France of a U.S. good that sells for $100 in the U.S.? g) Following the change in the exchange rate, which country's trade balance improves? h) Which country's trade balance worsens?

Answer 1

We can calculate the desired result as follows:

A) Exchange Rate = $ 1.30/ €

This means that in order to buy 1 Euro, we need to spend $ 1.30

Now price of good is 100 Euro in france will sell for

= 100 * 1.30

= $ 130 in US

B) Price of good is $ 100 in US will sell for

= 100 / 1.30

= 76.92 € in France

C & D Exchange Rate = $ 1.35/ €

This means that in order to buy 1 Euro, we need to spend $ 1.35, which means that Euro has appreciated. We can use the above example to understand this situation

Price of good is 100 Euro in france, earlier it was sold for $ 130, but now in order to puchase the same product $ 135 will have to be spent. So, more dollars are paid for same product. Therefore France Euro has appreciated and US Dollar has depreciated

E) New Cost in US for French good that sells for 100 Euro in france is

= 100 * 1.35

= $ 135

F) New Cost in France for US good that sells for $100 in US is

= 100 / 1.35

= 74.07 €

G & H) The Trade balance of France improves as it will earn more US dollars after the change in exchange rate and trade balance of US worsens as they now get less euros for the same product which earlier earned higher value.

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