EXCHANGE RATES & THE BALANCE OF PAYMENTS HELP:
(1) Suppose that the following 2 events take place in the market for Kuwait's currency,
the Dinar: The U.S. demand for oil, Kuwait's main export good, declines, and market
interest rates on financial assets denominated in Dinar decrease relative to U.S. interest
(a) What happens to the dollar price of the Dinar?
If this happens then there is less demand for Kuwait’s product, consequently less
demand for Dinar; also when market interest rates on financial assets denominated
in Dinar decrease relative to U.S. interest rates, there is again less demand for the
Dinar, therefore the price of the Dinar will decrease.
(b) Does the Dinar appreciate or depreciate relative to the dollar?
The Dinar price relative to the US dollar depreciates
(2) On Wednesday, the exchange rate between the euro and the U.S. dollar was $1.20 per
euro. On Thursday, it was $1.18.
(a) Did the dollar appreciate or depreciate against the euro?
The dollar has appreciated against the Euro, as it now takes fewer dollars to buy a
(b) By how much?
It appreciated by 1.7% (.02/1.20 = .017) or by $1.20 - $1.18 = $0.02.