Chapter 42, Problem 2FRQ

To determine

To draw: A labeled graph showing change in demand and the value of US dollar if imports from Europe are increased in US.

Explanation of Solution

In the graph shown below, X1 and X2 represent the exchange rate (number of Euros per dollar), S represents supply and D represents demand. The demand for USD is reduced and the exchange rate is also reduced. This will reduce the value of USD.

  

Graph 1

If US imports from Europe are increasing then the demand for the US dollar will decrease which will depreciate the value of US currency or the foreign exchange rates. Thus, the US dollar is depreciated.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.