Question

Assume the world only consits of the united states and germany, and that trade between them is balanced such that neither runs a trade deficit nor surplus. if exchange rates now change such that the euro becomes cheaper for americans to buy and all else remains the same, what would be the expected outcome?

a. u.s. exports to germany will ____

Answer 1

If the euro becomes cheaper for Americans to buy, the expected outcome is an increase in U.S. exports to Germany.

Step-by-step explanation:

If exchange rates change such that the euro becomes cheaper for Americans to buy, the expected outcome would be an increase in U.S. exports to Germany.

A cheaper euro makes German goods relatively more expensive for Americans, while making U.S. goods relatively cheaper for Germans. This creates an incentive for Germans to buy more goods from the United States, resulting in an increase in U.S. exports to Germany.

For example, if a German car costs 50,000 euros and the exchange rate is 1 euro = 1 dollar, the car would cost 50,000 dollars for an American. But if the exchange rate changes to 1 euro = 0.5 dollars, the same car would now cost only 25,000 dollars for an American. This reduced price would likely lead to an increase in demand for American cars from Germans.

Answer 2

A change in exchange rates making the euro cheaper for Americans would be expected to decrease U.S. exports to Germany, as U.S. goods become more expensive for Germans. Factors such as declining U.S. interest rates or an improved EU economy also have significant effects on exchange rates and trade balance.

Step-by-step explanation:

If exchange rates change such that the euro becomes cheaper for Americans to buy, we would expect U.S. exports to Germany to decrease. This is because the dollar has become relatively stronger compared to the euro, making U.S. goods more expensive for Germans to purchase. Consequently, demand for U.S. exports in Germany would likely diminish. If all else remains the same, such a scenario could potentially lead to a trade imbalance where the U.S. starts experiencing a trade surplus while Germany might run into a trade deficit.

Reflecting upon the scenarios provided where U.S. interest rates decline or the EU's economy picks up speed after sluggish growth, these factors influence the exchange rate and trade balance. If U.S. interest rates decline, the demand for dollars might decrease, supply might increase, and the dollar might weaken against the euro. Conversely, if the EU's economy improves significantly, this could potentially lead to a higher demand for European goods, potentially worsening the U.S. trade balance with the EU, impacting U.S. GDP and employment negatively.