Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$100 per night, and it costs the same this year. The exchange rate was 1.04 US$/C$ last year, and it is 0.95 US$/C$ this year. This means you will pay per night this year than you paid last year. The U.S. dollar-Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S. dollars. When this price falls, the Canadian dollar is said to depreciate against the U.S. dollar. Thus, from your analysis, you can conclude that when the Canadian dollar depreciates against the U.S. dollar, Canadian goods and services become expensive for Americans. DeutschAuto is a German automaker that pays most of its production costs in euros. Suppose that in 2007, DeutschAuto's cost of producing a car was €23,000 and that the company sold a car in the United States for $36,000. Further, suppose that the dollar-euro exchange rate rose from 1.35$/€ in 2007 to 1.55$/ € in 2008. DeutschAuto's euro cost of production did not change, and the company continued to charge $36,000 for its cars in the United States, as DeutschAuto believes this is its profit-maximizing price. Examine how the rise in the dollar-euro exchange rate affects DeutschAuto's profits from sales in the United States. (Hint: Ignore transportation costs.) In 2007, DeutschAuto's revenue from sales in the United States was DeutschAuto's profit was per car. In 2008, DeutschAuto's revenue from sales in the United States was DeutschAuto's profit was per car. per car. Given the cost of production, this means that per car. Given the cost of production, this means that
Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$100 per night, and it costs the same this year. The exchange rate was 1.04 US$/C$ last year, and it is 0.95 US$/C$ this year. This means you will pay per night this year than you paid last year. The U.S. dollar-Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S. dollars. When this price falls, the Canadian dollar is said to depreciate against the U.S. dollar. Thus, from your analysis, you can conclude that when the Canadian dollar depreciates against the U.S. dollar, Canadian goods and services become expensive for Americans. DeutschAuto is a German automaker that pays most of its production costs in euros. Suppose that in 2007, DeutschAuto's cost of producing a car was €23,000 and that the company sold a car in the United States for $36,000. Further, suppose that the dollar-euro exchange rate rose from 1.35$/€ in 2007 to 1.55$/ € in 2008. DeutschAuto's euro cost of production did not change, and the company continued to charge $36,000 for its cars in the United States, as DeutschAuto believes this is its profit-maximizing price. Examine how the rise in the dollar-euro exchange rate affects DeutschAuto's profits from sales in the United States. (Hint: Ignore transportation costs.) In 2007, DeutschAuto's revenue from sales in the United States was DeutschAuto's profit was per car. In 2008, DeutschAuto's revenue from sales in the United States was DeutschAuto's profit was per car. per car. Given the cost of production, this means that per car. Given the cost of production, this means that
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The dollar-euro exchange rate is essentially the price of one euro in terms of dollars. When this price rises, the euro is said to appreciate against the
dollar. Thus, from your analysis, you can conclude that when the euro appreciates against the dollar, it becomes
for European
companies to profit from exporting their products to the United States.
Suppose that the Japanese government and private investors hold $150 billion in U.S. Treasury securities. When the Japanese yen-U.S. dollar
exchange rate is 95 ¥/$, these assets are worth
If the dollar appreciates to 102 ¥/$, the U.S. Treasury securities held in Japan
will be worth
The yen-dollar exchange rate is essentially the price of one dollar in terms of yen. When this price rises, the dollar is said to appreciate against the
yen. Thus, from your analysis, you can conclude that when the dollar appreciates against the yen, holders of U.S. Treasury securities in Japan
experience
in their wealth.
Transcribed Image Text:8. Why exchange rates matter
Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$100 per night, and it costs the same
this year. The exchange rate was 1.04 US$/C$ last year, and it is 0.95 US$/C$ this year. This means you will pay
per night this year
than you paid last year.
The U.S. dollar-Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S. dollars. When this price falls, the Canadian
dollar is said to depreciate against the U.S. dollar. Thus, from your analysis, you can conclude that when the Canadian dollar depreciates against the
U.S. dollar, Canadian goods and services become expensive for Americans.
DeutschAuto is a German automaker that pays most of its production costs in euros. Suppose that in 2007, DeutschAuto's cost of producing a car was
€23,000 and that the company sold a car in the United States for $36,000. Further, suppose that the dollar-euro exchange rate rose from 1.35$/ € in
2007 to 1.55$/ € in 2008. DeutschAuto's euro cost of production did not change, and the company continued to charge $36,000 for its cars in the
United States, as DeutschAuto believes this is its profit-maximizing price. Examine how the rise in the dollar-euro exchange rate affects DeutschAuto's
profits from sales in the United States. (Hint: Ignore transportation costs.)
In 2007, DeutschAuto's revenue from sales in the United States was
DeutschAuto's profit was
per car.
In 2008, DeutschAuto's revenue from sales in the United States was
DeutschAuto's profit was
per car.
per car. Given the cost of production, this means that
▼per car. Given the cost of production, this means that
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