Suppose, for whatever reason, the trade deficit of the United States with Europe is projected to grow and suppose that before this happens the exchange rate between the euro and the dollar is .75 euros/dollar. The resulting exchange rate would likely

Question

Quizplus · Accepted Answer

If the trade deficit of the US with Europe is projected to grow, it means that the US will need to import more goods and services from Europe. This will increase the demand for euros, leading to a decrease in the supply of euros in the foreign exchange market, and a depreciation of the dollar. Therefore, the exchange rate is likely to fall to (perhaps).6 euros/dollar.

Suppose, for Whatever Reason, the Trade Deficit of the United