In the last week, Volkswagen (VW), the German car giant, has admitted cheating e

Question

In the last week, Volkswagen (VW), the German car giant, has admitted cheating emissions tests in the US. According to the Environmental Protection Agency (EPA), some cars being sold in America had devices in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results. VW has had a major push to sell diesel cars in the US, backed by a huge marketing campaign trumpeting its cars' low emissions. The EPA's findings cover 482,000 cars in the US only, including the VW-manufactured Audi A3, and the VW brands Jetta, Beetle, Golf and Passat. But VW has admitted that about 11 million cars worldwide are fitted with the so-called "defeat device". Due to this scandal, Germans are buying stocks of General Motors in the US.

a) Taking into consideration the market of euros, what is the impact of this decision on the amount of euros and the exchange rate of euros in terms of US Dollars?

b) Write out explanation for this question, fully explain any movement or shift in the demand or supply curves.

c) In a separate page, draw the market of foreign currency, labeling axes, curves, initial and final points?

Explanation / Answer

a) Euro is going to depreciate in terms of US dollars .

b) Supply curve of cars will decrease due to this scandal, thus exports will decrease. Also the demand of these cars will decrease due to faulty system recognised.

c) Thus currency will depreciate and also the quantity of exports will reduce.

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