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In February 2014, hostilities escalated between Russia and Ukraine over Crimea
In February 2014, hostilities escalated between Russia and Ukraine over Crimea. Predict the effects of these hostilities on the exchange rate between the U.S. dollar and the Russian Ruble. In March, an article in the Moscow Times reported: "the currency declined further in Monday trading, but a ruble that is losing value is a great prop for struggling local manufacturers, which now find themselves more competitive with Western imports." Explain the logic behind this statement using demand and supply curves.
Expert Solution
If the value of the Ruble decreased, it means that more Rubles will be needed for one euro/dollar than were needed before the value dropped. Therefore, foreign goods are now more expensive compared to locally manufactured goods. Therefore, consumers may choose to buy locally manufactured goods.
Say a merchant who is used to paying Rubles for their goods that they get from a foreign supplier now sees that the same good from a local supplier is cheaper. Naturally, they're going to buy locally. So though the Ruble is worth less, people buying from local sources can actually benefit the internal market.
Effectively, the supply curve has moved to the left. Fewer foreign goods can now be purchased for the same amount of Rubles.
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