If a Dutch firm buys goods from a U.S. firm with dollars it obtains by exchanging euros for dollars, both U.S. net exports and U.S. net capital outflow increase.

Question

Quizplus · Accepted Answer

When the Dutch firm exchanges euros for dollars, it increases the supply of euros in the foreign exchange market and increases the demand for dollars. This causes the value of the euro to decrease relative to the dollar and the value of the dollar to increase. As a result, U.S. net exports increase because the dollar is now relatively cheaper for the Dutch firm to buy goods from the U.S. firm. Additionally, the transaction represents a capital outflow from the Netherlands, which increases U.S. net capital outflow.

If a Dutch Firm Buys Goods from a U