Question

Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.” Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets:

a. A U.S. airline firm purchases several Airbus planes assembled in France.

b. A German automobile firm decides to build an assembly plant in South Carolina.

c. A U.S. college student decides to spend a year studying at the Sorbonne in Paris.

d. An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter.

e. The U.S. economy grows faster than the French economy.

f. A U.S. government bond held by a Spanish citizen matures, and the loan amount is paid back to that person.

g. It is widely expected that the Euro will depreciate in the near future.

Short answer

1. Creates demand for euros in the FOREX market.

2. Creates supply of euros in the FOREX market.

3. Creates demand for euros in the FOREX market.

4. Creates demand for euros in the FOREX market.

5. Creates demand for euros in the FOREX market.

6. Creates demand for euros in the FOREX market.

7. Creates supply of euros in the FOREX market.

Step-by-step solution

International trade and currency flow

All cross-border purchases and sales of currently produced goods and services are called international trade.

This involves exchanging one nation’s distinct currency for another. The currency flows from the buyers of the goods, services, or assets to the sellers of the goods, services, or assets. Importers are buyers, and exporters are sellers. As a result, imports cause outflows of domestic currency while exports cause inflows of foreign currency.

Supply and demand of euros created at the FOREX market

(a) When the U.S. airline firm purchases several Airbus planes assembled in France, this will create demand for euros in the FOREX market because the payments made for the imports will be in euro.

(b) When the German automobile firm decides to build an assembly plant in South Carolina, it will create a supply of the European Euro in the FOREX market because the German automobile is importing assets from South Carolina. In other words, since the German company will make expenditures in U.S. dollars, the supply of euro at the foreign exchange market is created.

(c) When the U.S. college student decides to spend a year studying at the Sorbonne in Paris, this will create demand for euros in the FOREX market as the student from the U.S. makes his expenditure in European currency.

(d) When the Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter, it will create demand for European Euro in the FOREX market because the Italian port will receive the payments in Euro only.

(e) When the U.S. economy grows faster than the French economy, this will create demand for euros in the FOREX market because the growth in the U.S. economy will stimulate its imports from the French market.

(f)The maturing of U.S. bonds in Spain will create demand for euros in the FOREX market because the U.S. government requires currency in terms of Euro to pay back to the Spanish person.

(g) If the Euro is expected to depreciate in the near future, this will create a supply of euros in the FOREX market because the European nation will increase imports from the international market (actually from the U.S.).