Question

As the dollar price of a foreign currency (for example, dollars per yen) increases, __________ dollars will be demanded by foreigners, U.S. goods will be __________ expensive for foreigners, __________ U.S. goods will be purchased by foreigners, and __________ foreign currency will be supplied to the foreign exchange market.

Answer 1

As the price of foreign currency in dollars rises, demand for dollars drops, making U.S. goods pricier abroad, reducing their purchase by foreigners, and increasing foreign currency supply in the market.

Step-by-step explanation:

As the dollar price of a foreign currency (for example, dollars per yen) increases, fewer dollars will be demanded by foreigners, U.S. goods will be more expensive for foreigners, fewer U.S. goods will be purchased by foreigners, and more foreign currency will be supplied to the foreign exchange market.

In the foreign exchange market, an increased exchange rate means that it becomes more expensive for foreigners to purchase dollars, leading to a reduction in the quantity of dollars demanded by them. Consequently, U.S. goods become more expensive for foreigners, reducing the amount of U.S. goods purchased. This also leads to an increase in the supply of foreign currency as foreigners sell more of their currency to obtain the required dollars at a higher price.

Answer 2

As the dollar price of foreign currency rises, fewer U.S. dollars are sought by foreigners, making U.S. goods pricier and leading to reduced purchases of these goods by foreigners, with a resulting increase in foreign currency supplied.

Step-by-step explanation:

As the dollar price of a foreign currency increases, fewer dollars will be demanded by foreigners, U.S. goods will be more expensive for foreigners, fewer U.S. goods will be purchased by foreigners, and more foreign currency will be supplied to the foreign exchange market. This happens because an increase in the exchange rate means that each unit of foreign currency buys fewer dollars. Consequently, foreign goods become relatively cheaper, and U.S. goods become more expensive for foreign buyers.

In the context of international financial investors, more U.S. dollars will be demanded to purchase U.S. government bonds, while fewer dollars already held will be supplied in these markets. This shift in demand and supply can cause the exchange rate to appreciate, as illustrated by the example where the rate was adjusted to 1.05 euros per dollar. Therefore, the exchange rate movement affects the demand and supply of currencies and subsequently international trade.