If, in 2020, AU$1 = 1.5 euro, and in 2021, AU$1 = 2.0 euro, which of the following statements would be true?Question 2Answera.More Australian tourists will find it more expensive to travel to Europe.b.More Australian will stay home as visits to Europe become more expensive.c.Australian will import fewer products from Europe.d.Australians will export fewer products to Europe.Clear my choice
Question
If, in 2020, AU1 = 2.0 euro, which of the following statements would be true?Question 2Answera.More Australian tourists will find it more expensive to travel to Europe.b.More Australian will stay home as visits to Europe become more expensive.c.Australian will import fewer products from Europe.d.Australians will export fewer products to Europe.Clear my choice
Solution
The correct answer is c. Australians will import fewer products from Europe.
Here's why:
If in 2020, AU1 = 2.0 euro, it means that the Australian dollar has strengthened against the euro. This means that Australians can now buy more euros with the same amount of Australian dollars.
This would not make travel to Europe more expensive for Australians, in fact, it would make it cheaper because their money now has more purchasing power in Europe. Therefore, options a and b are incorrect.
When a country's currency strengthens against another, it makes imports cheaper because they can now buy more of the foreign currency with their own. Therefore, it is likely that Australians will import more products from Europe, not less. So, option c is incorrect.
The effect on exports is a bit more complex. A stronger home currency can make a country's exports more expensive for foreign buyers, which could potentially reduce demand for those exports. However, this would depend on a variety of factors including the price elasticity of demand for the exports, the availability of substitutes, and so on. Therefore, without more information, we cannot definitively say that Australians will export fewer products to Europe. So, option d is also incorrect.
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