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Suppose the French suddenly develop a strong taste for California wines. Answer the following questions in words and with a diagram.a. What happens to the demand for dollars in the market for foreign-currency exchange?b. What happens to the value of the dollar in the market for foreign-currency exchange?c. What happens to U.S. net exports?
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Yi Chun Lin
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here. We're supposing that the french have increased their consumption of California wines. And to start we'd like to know what effect this is going to have on the demand for the US dollar and the value of the U. S. Dollar. So looking at this market for us dollars drawn here and assuming like we said that the friendship increased their consumption of California wines which are obviously sold in U. S. Dollars. This means that we're going to see an increase in the demand for US dollars because just more Wine is being purchased in those us dollars. So we're going to see this demand her shift from Dino to D. one. As a result of this increase, we can see that our equilibrium has changed, showing us that our price or otherwise our exchange rate or our value is going to increase from P. Note too pete one. So we're seeing this increase in the value of the U. S. Dollar as well as an increase in the demand for the U. S. Dollar. And looking at this, we want to know if we are experiencing any change to the U. S. Net exports and at first glance we might think that we're seeing this increase in that exports because we see that increase in exports relative to imports. However, keeping in mind that this value of the U. S. Dollar or this exchange rate has also increased. That's going to work to offset that increase in our exports. So our imports are instead going to change and this sort of offset that's happening is really going to leave us with no change to our US and that exports.
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