If a good were priced at 15 euros in Germany when the exchange rate between the dollar and the euro went from 1.50 euro/$1.00 to 2.00 euro/$1.00, the price of that good in US dollars would: a. decrease by $0.50 b. decrease by $2.50 c. increase by $2.00 d. increase by $0.50. e. increase by $7.50
The correct answer and explanation is :
Correct answer: b. decrease by \$2.50
Explanation:
To solve this problem, we must convert the euro price of the good into U.S. dollars using both the old exchange rate and the new exchange rate, and then compare the two to see how the price in dollars has changed.
Step 1: Understanding the Exchange Rates
- Initial exchange rate: 1.50 euro = \$1.00
→ This means 1 euro = \$0.6667 (1 ÷ 1.5) - New exchange rate: 2.00 euro = \$1.00
→ This means 1 euro = \$0.50 (1 ÷ 2.0)
Step 2: Convert the Price of the Good
The price of the good in Germany is 15 euros.
At the old rate (1 euro = \$0.6667):
15 euros × \$0.6667/euro = \$10.00
At the new rate (1 euro = \$0.50):
15 euros × \$0.50/euro = \$7.50
Step 3: Calculate the Change in Price
Old price in dollars: \$10.00
New price in dollars: \$7.50
Change: \$10.00 – \$7.50 = \$2.50 decrease
Why This Happens:
When the exchange rate increases from 1.50 to 2.00 euros per \$1, the euro has depreciated relative to the dollar. That means each euro buys fewer dollars, or equivalently, each dollar buys more euros.
So, if a good is priced in euros and the euro weakens, it becomes cheaper in dollar terms, even though the price in euros hasn’t changed. This benefits U.S. consumers buying European goods, as their dollars now go further.
Conclusion:
As a result of the exchange rate change, the U.S. dollar equivalent of a good priced at 15 euros decreases by \$2.50.
Answer: b. decrease by \$2.50