Figure 19.2
-Refer to Figure 19.2.Currency speculators believe that the value of the euro will decrease relative to the dollar.Assuming ceteris paribus,how would this be represented?

Question

Figure 19.2 
-Refer to Figure 19.2.Currency speculators believe that the value of the euro will decrease relative to the dollar.Assuming ceteris paribus,how would this be represented?

Quizplus · Accepted Answer

Supply would decrease, demand would increase and the economy moves from A to D to C.As speculators believe that the value of the euro will decrease relative to the dollar, they will sell euros and buy dollars, leading to a decrease in the supply of euros and an increase in the demand for dollars. This will cause the euro to depreciate against the dollar, moving the economy from point A to point D. As the euro depreciates, it will become cheaper for US consumers to buy European goods, leading to an increase in demand for euros and a decrease in the supply of dollars, moving the economy from point D to point C.

Figure 19.2 -Refer to Figure 19.2.Currency Speculators Believe That the Value of the Value