Political Instability Abroad Suppose that political instability in other countri
ID: 1218337 • Letter: P
Question
Political Instability Abroad Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. Refer to Political Instability Abroad. What would happen to the dollar?
A. It would appreciate in foreign exchange markets making U.S goods more expensive compared to foreign goods.
B. It would appreciate in foreign exchange markets making U.S. goods less expensive compared to foreign goods.
C. It would depreciate in foreign exchange markets making U.S. goods more expensive compared to foreign goods.
D. It would depreciate in foreign exchange markets making U.S. goods less expensive compared to foreign goods.
Explanation / Answer
a. It would appreciate in foreign exchange markets making U.S goods more expensive compared to foreign goods.
As the demand for US dollar rises, there is more demand and supply constant. This means there would be appreciation of the currency, due to which US goods will be more expensive and thus net exports from US will also fall.