Imagine that the dollar appreciates 10% against the Euro and depreciates 10% against the Yen.If dollar trade weights are 75% against the Euro and 25% against the Yen,what has happened to the dollar effective exchange rate?
A) It is unchanged
B) It has appreciated by about 5%
C) It has appreciated by about 10%
D) It has depreciated by about 5%
E) It has depreciated by about 10%

Question

Quizplus · Accepted Answer

The dollar's effective exchange rate has appreciated by about 5% because it appreciated 10% against the Euro (which has a 75% weight) and depreciated 10% against the Yen (which has a 25% weight). The net effect is a 7.5% appreciation (0.75 * 10%) minus a 2.5% depreciation (0.25 * 10%), resulting in a 5% overall appreciation.

Imagine That the Dollar Appreciates 10% Against the Euro and Depreciates