Contrast the effects to the euro and the U.S. dollar of a reduction in European tariffs on U.S. imports, ceteris paribus.
What will be an ideal response?
A reduction in European tariffs on U.S. goods would make U.S. goods more affordable to Europeans. They would buy more goods from the United States. This increased demand for U.S. goods would lead to increased demand for U.S. dollars to purchase those goods. To obtain these added U.S. dollars, Europeans would have to exchange more of their euros, increasing the supply of euros on the euro foreign exchange market. This would lead to a rightward shift in the euro supply curve, leading to a lower exchange rate for the euro. This depreciation of the euro relative to the U.S. dollar would mean an increase (appreciation) of the U.S. dollar relative to the euro. Thus, overall, the euro would depreciate and the U.S. dollar would appreciate in value relative to each other.
You might also like to view...
List four types of tax-deferred saving vehicles. How could tax-deferred saving vehicles, if modified, transform the U.S. income tax into a consumption tax?
What will be an ideal response?
Japanese economists worry that changes in the U.S. inflation rate have too large an effect on the Japanese economy. What type of exchange-rate regime should Japan have if it does not want U.S. inflation changes to impact the Japanese internal economy? Explain, using relative purchasing power parity (PPP) in your explanation.
What will be an ideal response?