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How would each of the following developments affect the exchange rate of the US dollar (state...

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Economics

How would each of the following developments affect the exchangerate of the US dollar (state whether the US dollar will getstronger or weaker)? Support your answer discussing the effects onthe demand and supply of a foreign currency or dollars and usingappropriate diagrams.

a. Increase in the expected inflation rate in the economies ofUS trading partners

b. Increase in the expected future exchange rate (US $ isexpected to grow stronger)

c. Americans are traveling less abroad because of the Covid 19situation

d. The European Union interest rate rises relative to the USinterest rate

e. Less foreign tourists are coming to the Florida beach forfear of covid 19.

Answer & Explanation Solved by verified expert
4.1 Ratings (760 Votes)
In each graph exchange rate P and quantity of dollars Q areshown along vertical and horizontal axis respectively D0 and S0are initial demand and supply of dollar intersecting at point Awith initial exchange rate P1 and quantity of dollar Q1aHigher inflation rate in trading partners will increase USexport demand which will increase the demand for dollar Thedemand curve for dollar shifts rightward to D1 Exchange rate willincrease appreciating    See Answer
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