Macro and Microeconomics - Essay Example

The exchange rate is 5.5francs/dollar meaning that one dollar is equivalent to 5.5 francs. Therefore, a Chrysler Neon costing 14,300 dollars will have the frank price calculate below: 1dollar = 5.5 francs 14,300 dollars= Franc price of Neon Using the principle of cross-multiplication, Price of Chrysler Neon = (14,300 dollars x 5.5 francs)/1dollar = 78,650 francs Question three Given that the franc depreciates by 9% and the initial exchange rate was 5.5 francs/dollar, the franc price of the shirt and dollar price of Chrysler Neon will be affected by the depreciation.

If the franc depreciates by 9% from its previous dollar value, the dollar price of the shirt will also change as depicted in the following calculations. Depreciation = 9% Taking the original exchange rate, 5.5 francs/dollar, to be 100%, then the value after depreciation must be higher than the initial value by exactly the same amount as depreciation. New value = (100 + 9) % = 109% Therefore, the new exchange rate = (109/100) x 5.5 francs/dollar = 5.995 francs/dollar Hence, the new price of the shirt = (220 francs x 1 dollar)/5.

995 = 37 dollars. . The reason is that as the products become cheaper, the domestic and foreign demand of the products will increase. As currency devaluation increases competitiveness, demand for the country’s export increases, resulting in an increase in aggregate demand. According to macroeconomic principles, an increase in aggregate demand will cause an increase in GDP (Boyes & Melvin, 2011, pg.273). On another monetary perspective, France receipt from foreigners might increase due to currency devaluation and exceed the outgoing payments hence leading to an improved balance of payments.

The fact that increased supply of foreign money leads to low supply of domestic currency highlights that an upward pressure will be placed on the domestic currency. Together with expensive imports due to currency devaluation, this pressure results in high price levels as well as higher GDP and employment levels. On the other hand, the depreciation in French franc will decrease the aggregate demand in United States. The currency devaluation means that the dollar will be stronger against the franc.

As a result, the US imports from France will increase as the products in the country become cheaper. Comparatively, US products will be expensive and unpopular in the domestic and foreign markets. Aggregate demand which is dependent on price levels will decrease as more people will be opting to buy from France (Boyes & Melvin, 2011, pg.273). In the meantime, the gross domestic production will decrease as demand decreases. In addition, the franc depreciation will lead to a fixed exchange rate that is lower than the equilibrium exchange rate.

This makes it cheaper for Americans to buy French goods and expensive for French people to