Question

Daily Exchange Rates: European Euros per U.S. Dollar 0.98 0.96 0.94 0.92 0.90 0.88 0.86 0.84 0.82 Jan Feb Mar Apr May Jun Ju Sep Oct NovDec 1) The first graph presented here shows the value of 1 US dollar measured in euros, during 2017. Notice the clear downward trend over the year. IF this trend was due to the impact on international trade of inflation in the USA and of inflation in the Eurozone, what would we conclude about the level of inflation in the USA compared to the level of inflation in the Eurozone? Explain. Draw a fully labeled foreign exchange market supply and demand diagram for the US dollar. Show the impact of US and eurozone inflation on the demand and supply for the dollar, and use your diagram to help explain your answer.

Answer 1

As shown in the figure the market for US dollars(USD) is discussed. The equilibrium exchange rate is 0.6 euros= 1 US dollar.

At 0.7 euros per dollar, there would be an excess supply for USD. At 0.5 Euros per dollar there would be excess demand for USD.

One of the causes of change in exchange rates is inflation rates. Higher inflation in any country relative to other
countries leads to currency depreciation.

If USA experiences a higher rate of inflation than other countries, demand for its exports falls (decrease in export competitiveness) as other countries get goods/services from USA at higher prices; at the same time, imports from other countries with lower inflation rates increase as USA gets them cheaper.

The fall in USA exports causes demand for the USD, to decrease, while the increase in imports causes supply of USD to increase.

This graph in question shows that rate of inflation in USA is higher than Eurozone countries.

ot O" O.