📚 Learning Guide
Flexible Exchange Rates
easy

If the Euro appreciates significantly against the Songland dollar, what is the most likely effect on Songland's economy?

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Choose the Best Answer

A

Increased exports from Songland due to cheaper prices

B

Decreased imports from the Eurozone due to higher costs

C

Increased aggregate demand in Songland due to lower currency value

D

Decreased investment in Songland from foreign investors

Understanding the Answer

Let's break down why this is correct

Answer

If the Euro appreciates significantly against the Songland dollar, it means that the Euro becomes more valuable compared to the Songland dollar. This can lead to more expensive imports for Songland since they would need to spend more of their dollars to buy goods priced in Euros. For example, if a European car costs 20,000 Euros, and the exchange rate changes so that it now costs 25,000 Songland dollars instead of 20,000, people in Songland might buy fewer European cars. As a result, Songland's economy could suffer because consumers may spend less on imported goods, leading to reduced sales for businesses that rely on these products. Overall, this situation can slow down economic growth and affect jobs related to international trade.

Detailed Explanation

When the Euro gets stronger, it costs more Songland dollars to buy things from the Eurozone. Other options are incorrect because Some might think that cheaper prices mean more exports; People might believe that a lower currency value boosts demand.

Key Concepts

Flexible Exchange Rates
International Trade
Aggregate Demand
Topic

Flexible Exchange Rates

Difficulty

easy level question

Cognitive Level

understand

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