International Trade The purpose of this assessment is to analyze two scenarios a

Question

International Trade
The purpose of this assessment is to analyze two scenarios and use the principles of international trade.

Assessment Description:
Analyze the given scenarios and based on international trade and currency depreciation, answer the related questions.

Scenario 1: Suppose the signs of an improvement in the U.S. economy lead international investors to resume lending to the U.S. government and businesses. Policymakers, however, are worried about how this will influence the dollar. How would this event affect the market for the dollar? How should the central bank, the Fed, respond to this event if it wants to keep the value of the dollar unchanged?

Scenario 2: In 2014, the European Union banned the import of Indian mangoes. Recently, the ban was lifted and Indian mangoes were allowed to be imported in the European Union. Compare and contrast the change in the prices of mangoes in the local Indian market before and after the lifting of the ban.

Explanation / Answer

SCENARIO - 1

As global investors invest more in US economy, the demand for dollar rises worldwide, which leads to an appreciation of dollar. To counter the upward pressure on Dollar, the Fed can respond by selling Dollars and buying foreign exchange in the foreign exchange market, which will incraese the supply of dollars and thus neutralizing the appreciation of dollar.

SCENARIO - 2

Before the ban, Indian mango producers were unable to sell globally (at a possibly higher price) and so, were compelled to sell at domestic market only. So, in Indian maret, supply of mangoes was higher and price was lower. After the ban was removed, export of mangoes to EU lowered the supply of mangoes in Indian domestic market, which increased the price of mangoes in Indian market.

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