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Chapter 30: Problem 13

(Related to the Apply the Concept on page 1067 ) An article in USA Today argued, "lronically, the euro's falland the benefit for German exports -is largely the result of eurozone policies that Germany has taken the lead in opposing ... [including] easier money policies by the European Central Bank." a. How does the "euro's fall" benefit German exports? b. How is the euro's fall related to policies of the European Central Bank?

Short Answer

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a. The euro's fall benefits German exports by making them cheaper and more attractive in the international market. b. The euro's fall is related to the policies of the European Central Bank because easier money policies tend to lower the value of a currency, in this case, the Euro. However, at the same time, it is noted that Germany has opposed such policies, possibly due to concerns over price stability and inflation.

Step by step solution

01

Understanding the impact of currency value on Exports

In an international trade context, if the value of a country's currency falls (in this case, the Euro), the price of its exports becomes more competitive in the global market. This happens because a weaker currency means foreign buyers need less of their own currency to buy the same amount of goods. So, for a country like Germany, a fall in the euro's value would make their exports cheaper and thus increase their overall exports. This ultimately benefits the German economy as it can lead to a trade surplus and economic growth.
02

Relating currency value to Central Bank's Policies

The value of a currency can be significantly influenced by the policies of a country's central bank. Central banks like the ECB can adopt 'easier money policies' or 'expansionary monetary policies', which involve measures such as lowering interest rates or increasing the money supply. Such measures can lead to a fall in the value of the currency as lower interest rates discourage foreign investments causing the demand for the currency to decrease. Consequently, the currency's value falls which, as discussed earlier, would benefit German exports.
03

Recognizing the significance of German opposition

Interesting part of this scenario is that Germany has reportedly opposed the very policies causing the euro's fall. This could be key to understanding the broader dynamics within the Eurozone, with Germany's perspective possibly focusing more on price stability and avoiding inflation, as these easier money policies could also lead to rising inflation if not regulated properly.

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