Assume the country of Sluban ties its currency (the slu) to the dollar and the exchange rate will remain fixed. Sluban has frequent trade with countries in the eurozone and the United States. All traded products can easily be produced by all the countries, and the demand for these products in any country is very sensitive to the price because consumers can shift their purchases to whatever products are relatively cheap. Assume that the euro depreciates substantially against the dollar during the next year. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the eurozone? Explain. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the United States? Explain.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 6, Problem 4ST
Textbook Problem

Assume the country of Sluban ties its currency (the slu) to the dollar and the exchange rate will remain fixed. Sluban has frequent trade with countries in the eurozone and the United States. All traded products can easily be produced by all the countries, and the demand for these products in any country is very sensitive to the price because consumers can shift their purchases to whatever products are relatively cheap. Assume that the euro depreciates substantially against the dollar during the next year.

  1. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the eurozone? Explain.
  2. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the United States? Explain.

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