If the dollar falls by 20% against the euro and rises by 10% against the yen, which of the following values for European and Japanese trade with the United States are consistent with a 10% increase in the effective exchange rate of the United States?
A) Europe: 33%; Japan: 66%
B) Europe: 66%; Japan: 33%
C) Europe: 50%; Japan: 50%
D) None of these values is consistent with this increase.

Question

Quizplus · Accepted Answer

The effective exchange rate is a weighted average of a country's currency relative to an index or basket of other major currencies. The given percentages of trade with Europe and Japan do not provide enough information to directly calculate the effective exchange rate change without knowing the starting values of the currencies and the exact method of calculation used for the effective exchange rate. Therefore, without additional specific information, none of the provided options can be definitively consistent with a 10% increase in the effective exchange rate of the United States.

If the Dollar Falls by 20% Against the Euro and Rises