Chapter 11, Problem 11.1C

Effects of Changing Exchange Rates
Analysis

Since the early 1970s, the U.S. dollar has both increased and decreased in value against other currencies such as the Japanese yen, the Swiss franc, and the British pound. The value of the U.S. dollar, as well as the value of currencies of other countries, is determined by the balance between the demand for and the supply of the currency on the foreign exchange markets. A drop in the value of the U.S. dollar has a widespread impact not only on consumers and businesses that deal with their counter−parts overseas but also on consumers and business that operate solely within the United States.

Required
a. Identify the factors that influence the demand for and supply of the U.S. dollar on the foreign exchange markets.
b. Explain the effects a drop in value of the U.S. dollar in relation to other currencies on the foreign exchange markets has on
(1) The sales of a U.S. business firm that exports part of its output to foreign countries.
(2) The costs of a U.S. business firm that imports from foreign countries part of the inputs used in the manufacture of its products.
c. Explain why and how consumers and business firms are affected by the drop in value of the U.S. dollar in relation to other currencies on the foreign exchange markets.