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Currency Conversion and Effect of Currency Depreciation

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Problem :

One type of toy bears is in China and exported to the US. A toy bear sells for 16 Yen in China. The exchange rate of Chinese yen and US dollars is $1 = 8 Yen.

a. what will be the price of this toy bear in US dollars?

b. Suppose the US demand for this toy bear is D = 100- 10*P. P is the price in US dollar, what is the quantity of US demand for this toy bear?

c. If the Chinese yen is depreciated by 20%. This means Chinese yen is worth 80% of its previous value compared to US dollar. What will be the US quantity of demand for this toy bear?

d. What conclusion you can make on the impact of exchange rate on exports?

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Solution Summary

The problem is related to a product exported to US which is manufactured in china. Solution describes the steps in calculating demand of toy bears in USA. Effect of depreciation in Chinese currency is studied on demand of toy bears in USA.

Solution Preview

a. what will be the price of this toy bear in US dollars?

The price is US Dollars = 16 yen / 8yen = $2

b. Suppose the US demand for this toy bear is D = 100- 10*P. P is the price in US dollar, what is the quantity of US demand for this toy bear?

D=100 -10*P = ...

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