Chapter 15: 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

Expert verified

A stronger euro would have various effects on different economic agents: a) A British exporter to Germany would benefit as repatriated earnings would be worth more in pounds; b) A Dutch tourist visiting Chile would benefit as they can exchange fewer euros for the same amount of Chilean pesos; c) The net effect on a Greek bank investing in a Canadian government bond is uncertain and depends on future exchange rate changes; d) A French exporter to Germany would experience neutral impact since both countries use euros, eliminating exchange rate risk.

Step by step solution

Analyze the impact of a stronger euro on a British exporter to Germany.

To assess the impact, we need to understand that a British exporter typically earns revenue in euros by selling goods to Germany. When the euro strengthens, it means that the value of the euro increases relative to the British pound. As a result, when the British exporter repatriates its earnings back to the UK, it would receive more pounds for each euro earned, effectively boosting its profits. So, a stronger euro would benefit British exporters to Germany.

Examine the effects of a stronger euro on a Dutch tourist visiting Chile.

The Dutch tourist will need to exchange euros for Chilean pesos while traveling in Chile. When the euro is stronger, it means that its value has increased relative to other currencies, including the Chilean peso. With a stronger euro, the Dutch tourist can exchange fewer euros to get the same amount of Chilean pesos, making the trip cheaper. Thus, a stronger euro would benefit Dutch tourists visiting Chile.

Analyze the influence of a stronger euro on a Greek bank investing in a Canadian government bond.

The Greek bank will need to exchange euros for Canadian dollars to invest in the bond. When the euro strengthens, it means that the value of the euro increases relative to other currencies, including the Canadian dollar. As a result, the Greek bank needs to exchange fewer euros to get the same amount of Canadian dollars. However, when the bond matures and the bank converts the Canadian dollars back into euros, the stronger euro would result in lower returns. In conclusion, the net effect of a stronger euro on a Greek bank investing in Canadian bonds is uncertain and depends on the future exchange rate changes.

Assess the consequences of a stronger euro for a French exporter to Germany.

As both France and Germany are part of the Eurozone, they both use the euro as their currency. Consequently, French exporters earn their revenue in euros for the goods they sell to Germany, and there is no need to exchange the currency. Therefore, the impact of a stronger euro on a French exporter to Germany would be neutral since there is no exchange rate risk involved. However, it is essential to note that a stronger euro might adversely affect exports from the Eurozone to countries with a different currency.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!