Suppose, for whatever reason, the trade deficit of the United States with Europe is projected to fall 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 United States with Europe falls, it means the United States will be importing less and exporting more to Europe. This will cause an increase in demand for dollars by European buyers, which will cause an increase in the value of the dollar relative to the euro. Therefore, the exchange rate is likely to rise from .75 euros/dollar to (perhaps) .9 euros/dollar.

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