Exhibit 20-8
-Exhibit 20-8 shows the market for euros in the US. Initially the demand for euros is represented by D₁ and the supply of euros is represented by S₁. Equilibrium in the market for euros is at point A. In response to a decrease in the income of US consumers the equilibrium moves to point H and the euro ________.

Question

Exhibit 20-8

-Exhibit 20-8 shows the market for euros in the US. Initially the demand for euros is represented by D₁ and the supply of euros is represented by S₁. Equilibrium in the market for euros is at point A. In response to a decrease in the income of US consumers the equilibrium moves to point H and the euro ________.

Quizplus · Accepted Answer

A decrease in income of US consumers is likely to lead to a decrease in demand for euros (as US consumers will have less disposable income to spend on imports from the eurozone). This will shift the demand curve for euros to the left, from DS1U1B1 to DS2U2B2. At the same time, it is unlikely to have a significant effect on the supply of euros (which is largely determined by eurozone monetary policy). Therefore, the new equilibrium point will be at H, with a lower quantity of euros being exchanged at a lower price (i.e. a lower exchange rate). This means the euro has depreciated in value relative to the US dollar.

Exhibit 20-8 -Exhibit 20-8 Shows the Market for Euros in the US