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Chapter 30: Problem 14

In January \(2007,\) before the financial crisis, the exchange rate was \(\$ 1.30\) per euro. In July 2008 , during the financial crisis, the exchange rate was \(\$ 1.58\) per euro. Was this change in the dollar-euro exchange rate good news or bad news for U.S. firms exporting goods and services to Europe? Was it good news or bad news for European consumers buying goods and services imported from the United States? Briefly explain.

Short Answer

Expert verified
The change in the exchange rate during the financial crisis was good news for US firms exporting to Europe as their goods became cheaper and more attractive in the European market, potentially boosting their sales. It was also good news for European consumers as they could buy more US goods for the same amount of euros. However, for Europeans traveling or buying services from the US, this situation is not beneficial.

Step by step solution

01

Understand the Exchange Rate Dynamics

Initially, 1 euro was equivalent to $1.30. However, over time, it became $1.58 for 1 euro. An increase in the exchange rate signifies that it requires more dollars to buy 1 euro. This means the dollar has weakened relative to the euro. Meanwhile, the euro has strengthened as it now demands more dollars.
02

Impact on US Firms Exporting Goods to Europe

For US firms exporting to Europe, the depreciation of the dollar can be beneficial. Now, European consumers can buy more US goods with their euro as they will have more dollars for the same amount of euro. Consequently, US exports become cheaper and more attractive in Europe, potentially increasing sales of US exporting firms.
03

Impact on European Consumers Buying US Goods

For European consumers, this change in the exchange rate is beneficial. They have to exchange fewer euros to get the same amount of dollars. Therefore, they can buy more US goods with the same amount of money. However, it would be a different case if we were talking about Europeans traveling to the US or buying US services.

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Most popular questions from this chapter

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