Chapter 17, Problem 1Q

To determine

Willingness to visit Country R and Country P when Euro is appreciated.

Explanation of Solution

Appreciation of currency means that the increase in the value of domestic currency relative to foreign currency. Appreciation of currency makes foreign goods cheaper relative to the domestic goods.

There will be less willingness for Country P and Country R vacation as they both are European countries. With the appreciation in European currency by 15%,Country P and Country R vacation will become more expensive. It will cost more in terms of dollar to visit Europe. Abroad vacations, goods, and serviceswill become cheaper for the European people as their currency appreciated.

Economics Concept Introduction

Introduction:Exchange rate is the rate at which domestic currency is exchanged with foreign currency. Exchange rate provides the relative price of good in terms of domestic and foreign currency. Exchange rate is very volatile and it affects the economy’s foreign trade. Exchange rate can be calculated as:

$\text{Exchange}\text{Rate}\left(e^t\right)=\frac{\text{Foreign}\text{price}\text{level}{\text{(P}}_{\text{f}}\text{)}}{\text{Domestic}\text{Price}\text{level}{\text{(P}}_{\text{d}}\text{)}}$