Good Country A B S 8 6 T

Good/ Country:    A        B

S:        8         6

        T:        12       3

Assume in the above that country A uses dollars ($) and country (B) uses Euro (€), and that the exchange rate had been $1 = € 1. This implies that the wage rate in Euro in country B = € 15. Now, suppose the exchange rate changes to $2 = €1. Now, €1commands $2 instead of $1.

H. Which currency appreciates? Which depreciates? Explain.

I. At this new exchange rate, will trade take place? Explain.

       J. If trade takes place, does this change in currency values alter the real purchasing power (what an hour of their labor will purchase) of consumers in either or both countries? Explain.

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