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Homework answers / question archive / An appreciation of the Euro relative to the U
An appreciation of the Euro relative to the U.S. dollar will cause: 1) The cost of European imports to fall for U.S. consumers. 2) The cost for a U.S. student to study in Europe to rise. 3) The price of European exports to the United States to fall. 4) A trade conflict to erupt between Europe and the United States.
An appreciation of the Euro relative to the U.S dollar will cause:
Answer: Option (2): The cost of a U.S student to study in Europe to rise.
Appreciation of a currency means an increase in the relative value of one currency compared to another.
So when the Euro appreciated relative to U.S Dollar. It means that the Euro becomes more valuable compared to U.S Dollar. It means now the U.S citizens can buy less Euro with the same U.S dollars. And vice versa.
As the Euro's value increases compared to the U.S dollar. So the goods and services of Europe become costly compared to the U.S. And U.S goods and services become cheaper compared to Europe.
As European goods and services become costly for U.S consumers. Therefore the cost and price of importing from Europe increases. It means that now U.S consumers will have to pay more for European goods and services.
Therefore the U.S students cost of studying in Europe increases. So the option (2) is correct.
Why other options are not correct:
Option (1): The cost of European imports to fall for the U.S consumers: As the Euro appreciates against U.S Dollar. It means that the value of the Euro increases compared to U.S Dollar. So now U.S Dollar will be able to buy less European goods and services. So the cost of European imports will rise for U.S consumers and not fall. Therefore this option is not correct.
Option (3): The price of European exports to the United States to fall.
NOTE: Europe exporting to the U.S in the same U.S importing from Europe. Like in option (1).
As the Euro appreciates against U.S Dollar. It means that the value of the Euro increases compared to U.S Dollar. So now U.S Dollar will be able to buy less European goods and services. So the price of European exports will rise to the U.S will rise and not fall. Therefore this option is not correct.
Option (4): The appreciation of a currency affects the relative value of a currency. And doesn't cause trade conflict. So this option is incorrect.
Therefore the correct option is (2): The cost of a U.S student to study in Europe to rise.
