Chapter 18, Problem 3Q

To determine

The effect of fall in the value of dollar on American exports and imports

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 foreigntrade. Exchange rate can be calculated as:

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