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    exchange rate

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    Despite substantial weakness in the US economy and the turmoil in credit markets, the US Dollar has increased substantially in value against the Euro since last summer, (although since mid March it has given back some of those gains as recent data has suggested that the US economy's decline is slowing and growth in RGDP may resume later this year.) Given the current condition of the US economy, do you think US policy makers would prefer to see the $ rise in value, decline in value or stay at its current value? Discuss the advantages and disadvantages of a stronger/weaker $.

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    Solution Preview

    Exchange rate changes have major impacts on the state of economies. The first impact is on net exports, that is exports - imports, which is a component of the GDP.

    Consider for example the case of the Dollar and the Euro. Take two hypothetical numbers. Suppose that one year ago the exchange rate between the Dollar and the Euro was 1 Euro = 1.5 USD. Now consider two companies: Ford and Fiat. They both make cars. Suppose they both sell cars in Europe and the US. Ford makes the cars in the US, while Fiat makes it in Europe. Now suppose the cost of each Ford car is $20000 while that of each Fiat car is 12000 Euros. If Ford sells cars in Europe then one year ...

    Solution Summary

    Dollar and the Euro are compared. The weakness in the United States economy and the turnmoil in credit markets are determined.