Chapter 29: Problem 1

How will a stronger euro affect the following economic agents? a. A British exporter to Germany. b. A Dutch tourist visiting Chile. c. A Greek bank investing in a Canadian government bond. d. A French exporter to Germany.

Short Answer

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A stronger Euro would have varying effects on different economic agents. A British exporter to Germany would face decreased demand due to less competitive pricing, while a Dutch tourist visiting Chile would benefit from increased purchasing power in terms of Chilean Pesos. A Greek bank investing in a Canadian government bond would see a decrease in their investment value when converting back to Euros, and a French exporter to Germany would not experience direct exchange rate effects but might face competition from producers in countries with weaker currencies.

Step by step solution

1. The effect of a stronger Euro on a British exporter to Germany.

A British exporter selling goods to Germany would experience less competitive pricing in the German market, as a stronger Euro leads to a weaker British Pound. Consequently, the price of British goods in terms of Euros would become higher, causing a decrease in demand for the British exporter's products in Germany. The British exporter might need to lower their prices in Pounds or increase product quality to maintain their market share.

2. The effect of a stronger Euro on a Dutch tourist visiting Chile.

A Dutch tourist visiting Chile would benefit from a stronger Euro, as it will give them more purchasing power in terms of Chilean Pesos. This is because the value of the Euro increases relative to other currencies, so they can exchange their Euros for more Pesos than before. The Dutch tourist can now enjoy more goods and services in Chile at a relatively lower cost.

3. The effect of a stronger Euro on a Greek bank investing in a Canadian government bond.

A Greek bank investing in a Canadian government bond would see a decrease in the value of their investment when converted back into Euros. The stronger Euro means that the Canadian Dollar is relatively weaker. Therefore, when the bank receives their return on investment and exchanges their Canadian Dollars back into Euros, they will receive fewer Euros than before, reducing their potential profits from this investment.

4. The effect of a stronger Euro on a French exporter to Germany.

A French exporter selling goods to Germany would not experience any direct exchange rate related effects because they are both in the Eurozone, using the same currency (Euro). There will be no currency risk, and the exchange rate will remain 1:1. However, indirect effects might include potential changes in the competitiveness of their products against non-Eurozone countries' products. If their goods are more expensive in countries with a weaker currency, they might lose market share to competitors whose products become relatively cheaper.

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