Suppose an individual in the United States wants to buy office equipment from England that costs 2800. If the exchange rate is $1.92/ (or 1 = $1.
Suppose an individual in the United States wants to buy office equipment from England that costs £2800. If the exchange rate is $1.92/£ (or 1£ = $1.92), how much will this equipment cost in US dollars? Now suppose that the US dollar ($) appreciates relative to the British pound (£) so that the new exchange rate is $.80/ £. How much will this same office equipment from England cost in US dollars? What is likely to happen to demand in the US for imported goods from England? What is likely to happen to demand in England for goods from the US (i.e. US exports)? Given that a nation’s trade balance is computed as Exports minus Imports, will an appreciating US dollar improve or worsen its overall trade balance?
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