Value of the Dollar

Value of the Dollar - Value of the $ First we need to...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Value of the $ First we need to distinguish between the value of the dollar in the US and the value on international markets or the exchange rate. 1- the value of the $ in the US is determined by what it can buy and therefore it is affected by the price level. If prices go up, then the value goes down because you can buy less with it 2- the value of the $ on international markets is determined by the demand and the supply of dollars Why do foreigners demand dollars ? - to import from the US because in order to buy California wine, a French citizen or business would need to exchange euros for dollars to make the transaction. As this takes place there is an increases in the demand for dollars (the value goes up) and there is an increased supply of euros (that will make the euro go down) - to invest in the US (again, they need to demand dollars to build factories or buy bonds and stocks in the US) - to put money in US banks (that would happen if our interest rates are higher than in other countries) When would the supply of dollars increase? - if the US imports from abroad - if US citizens invest abroad If the supply of dollars increases globally, then the value of the currency decreases (as with any good, if there is too much of a good, then the value or the price will decrease). Since the early 80’s the US has had a persistent trade deficit. Our imports far exceed our exports (for 2006 the trade deficit was of over $800 billion!!! We had reached a little under $70 billion of deficit per month!). As a result it was clear that our currency was overvalued since our exports seemed to be too expensive and therefore low as compared
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 4

Value of the Dollar - Value of the $ First we need to...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online