2. Explain what happens to the United States dollar relative to the euro (5 poin

Question

2. Explain what happens to the United States dollar relative to the euro (5 points each), if: a. The rate of inflation is higher in the United States than in Europe? b. Productivity is higher in the United States than in Europe? c. European preferences for United States goods increase? d. United States raises its tariff rates on European goods? e. Interest rates in Europe rise relative to interest rates in the United States? f. GDP growth rate rises in the United States relative to growth rates in Europe?

Explanation / Answer

2. a. The U.S. dollar will depreciate against the Euro. Higher rate of inflation will make U.S. goods expensive and the foreign goods ( if their inflation rate is stable) more cheaper. The demand for foreign goods by U.S. nationals will increase and there will be an outflow of U.S. dollars which will lead to its depreciation against the Euro.

b.If productivity is higher in the U.S. than in Europe, the U.S. dollar will appreciate since U.S. goods will be cheaper than foreign goods.

c.If Europoean preferences for United States goods increase, demand for U.S. goods will increase, U.S. exports will increase and U.S. dollar will appreciate in value.

d.Imposition of tariff will cause the U.S dollar to appreciate against the Euro. Tariff will decrease imports so the demand for Euros will fall and this will make the U.S dollar appreciate in value.

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