For each of the following, state whether it creates a demand for or a supply of U.S. dollars:?
(a) A Japanese automobile firm builds an assembly plant in Ohio. (b) A U.S. importer purchases a shipload of Saudi Arabia oil. (c) A U.S. student spends a summer in England studying in Oxford. (d) A French exporter ships products to Argentina using an American freighter. (e) Currency traders feel that the value of the U.S. dollar will fall in the near future and act on that feeling.
Economics - 1 Answers
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(a) Demand for USD. They cannot invest their Yen in our country, instead they will have to buy dollars in the foreign exchange market to directly invest in the US by establishing an assembly plant here. (b) Supply for USD; they will first have to purchase the currency Saudi Arabia uses before they can purchase the oil they are selling. (c) Supply for USD; the use of the British Pound is necesary in the UK therefore the USD will not be of any assistance to the student studying in Oxford for a summer. (d) Demand for USD; The demand for the dollar will increase before they use the service of the American freighter to ship their products to Argentina. (e) Supply for USD; If those trading currency feel as if its value is going to depreciate, or fall, they're going to be inclined to sell the US dollar. Also, if you're having problems understanding these concepts (also with your other questions about exchange rates) just think in every situation: who wants the money? Like for example in (a), if a Japanese auto firm is building an assembly plant in the United States, is the demand for the Yen going to increase? No - simply because the US doesn't accept the Yen as currency. However, the demand for the dollar will increase because those have to be purchased before the Japanese auto firm can invest and build their assembly plant here.
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