Suppose that you go on vacation to Canada every summer. Last year, the hotel roo

Question

Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$120 per night, and it costs the same this year. The exchange rate was 1.1 US$/C$ last year, and it is 0.98 US$/C$ this year. This means you will pay per night this year than you paid last year. The U.S. dollar-Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S. dollars. When this price falls, the Canadian dollar is said to depreciate against the U.S. dollar. Thus, from your analysis, you can conclude that when the Canadian dollar depreciates against the U.S. dollar, Canadian goods and services become expensive for Americans. DeutschAuto is a German automaker that pays most of its production costs in euros. Suppose that in 2005, DeutschAuto's cost of producing a car was 25,500 and that the company sold a car in the United States for $38,000. Further, suppose that the dollar-euro exchange rate rose from 1.15$/in 2005 to 1.35$/in 2007. DeutschAuto's euro cost of production did not change, and the company continued to charge $38,000 for its cars in the United States, as DeutschAuto believes this is its profit-maximizing price. Examine how the rise in the dollar-euro exchange rate affects DeutschAuto's profits from sales in the United States. In 2005, DeutschAuto's revenue from sales in the United States was per car. Given the cost of production, this means that DeutschAuto's profit was per car. In 2007, DeutschAuto's revenue from sales in the United States was per car. Given the cost of production, this means that DeutschAuto's profit was per car. The dollar-euro exchange rate is essentially the price of one euro in terms of dollars. When this price rises, the euro is said to appreciate against the dollar. Thus, from your analysis, you can conclude that when the euro appreciates against the dollar, it becomes for European companies to profit from exporting their products to the United States. Suppose that the Japanese government and private investors hold $900 billion in U.S. Treasury securities. When the Japanese yen-U.S. dollar exchange rate is 118 ¥/$, these assets are worth. If the dollar depreciates to 112 ¥/$, the U.S. Treasury securities held in Japan will be worth. The yen-dollar exchange rate is essentially the price of one dollar in terms of yen. When this price falls, the dollar is said to depreciate against the yen. Thus, from your analysis, you can conclude that when the dollar depreciates against the yen, holders of U.S. Treasury securities in Japan experience in their wealth.

Explanation / Answer

1.

A. Night Stay=C$120 Per Night which is equivalent to USD=120*1.1=$132

The same US$ 132 is charged this year means C$ is depreciated against US$

Therefore, We have to pay C$120 x .98=$117.60

B. Less Expensive For Americans

2.

Deutsch Auto'sCost of Producing Car in 2005=Euro 25500

Sales Price in United States for the year 2005=$38000

In 2005, 1 Euro=$1.15

In 2007, 1 Euro=$1.35

A. $38000, $38000-Euro 25500 x 1.15-=$38000-$29325=$8675

B. $38000, $38000-Euro 25500 x 1.35-=$38000-$34425=$3575

C. More Expensive

3.

A. $900=900 x 118=Yen 106200, 900 x 112=Yen 100800

B. A Loss

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