Chapter 29, Problem 1SCQ

How will a stronger euro affect the following economic agents?

1. A British exporter to Germany.
2. A Dutch tourist visiting Chile.
3. A Greek bank investing in a Canadian government bond.
4. A French exporter to Germany.

To determine

(a)

Effect of stronger Euro on British exporter to Germany.

Answer to Problem 1SCQ

The British exporter will be benefited with stronger euro.

Explanation of Solution

The exporter of any country will be benefited when their currency depreciates. The reason being that the firm must pay their employees in their own currency whereas from export the firm is getting other country’s currency. The exporter will get extra currency when he exchanges foreign currency in to domestic currency.

Economics Concept Introduction

Introduction:

Pound sterling currency is used by Britishers and Germans use Euro as their currency. So, the exporter of Britain will get euros from their export business and later British exporter will require to convert euros in to pounds to meet their expenses at home country.

To determine

(b)

Effect of stronger Euro on Dutch tourist.

Answer to Problem 1SCQ

Dutch tourist will be better off from the strong euros.

Explanation of Solution

Appreciation or strong euros means Dutch traveler will find cheaper to travel in Chile as a result Dutch tourist will enjoy less expensive vacation and he can stay in Chile for more days and enjoy better because he is getting extra pesos for their euros.

Economics Concept Introduction

Introduction:

The currency euro is used by Dutch while Pesos is used by Chile. Travelling in foreign country requires the traveler to exchange their domestic currency with the currency of the country where he is going to travel.

To determine

(c)

Effect of stronger Euro on Greek Bank investing in Canadian government bonds.

Answer to Problem 1SCQ

Strong euro will benefit the Greek banks who are buying Canadian Government bonds.

Explanation of Solution

An increase in the value Euro means that more Canadian dollars can be bought for same Euro. As consequences, the Greek bank will find decrease in the cost of the Canadian Government bonds and as a result Greek bank will be able to buy more bonds.

Economics Concept Introduction

Introduction:

The Canadians use dollars as their currency and Greeks use euros. Increase in the value of euro means Canadian dollars become cheaper for Greek bank.

To determine

(d)

Effect of stronger euro on French exporter to Germany.

Answer to Problem 1SCQ

The effect of stronger euros will be neutral in case of these two countries.

Explanation of Solution

Increase in euro means currency euro is costlier than other currency. In this case, the effect of euro will have no impact on the French exporter because both the countries, French and German, have same currency.

Economics Concept Introduction

Introduction:

In this case both the country using the same currency that is euros.