Question

Exchange rates will affect the price of _____ a. sugar cane grown in the United States. b. California wine produced in California and consumed in Florida. c. coffee grown in Brazil and consumed in Brazil. d. coffee grown in Brazil. e. coffee grown in Brazil and imported to the United States.

Answer 1

Answer:

The correct answer is e. coffee grown in Brazil and imported to the United States.

Explanation:

Depending on whether the movement of the exchange rate is up or down, there are two types of effects:

1. Revaluation: Occurs when a country's currency increases its value compared to other foreign currencies; therefore, the low exchange rate and, in the Colombian case, less pesos must be given for a unit of foreign currency (dollar)
2. Devaluation: Occurs when a country's currency reduces its value compared to other foreign currencies; therefore, the exchange rate increases and, in the Colombian case, more pesos are needed to buy a unit of the foreign currency.

In countries that have a controlled exchange market, devaluation is a decision made by the government as a result of, or to face a given economic situation. In contrast, when the currency of a country with a totally free exchange rate, it is devalued when in that market there is a demand greater than the supply of foreign currencies (under this exchange rate regime, the devaluation is known as | depreciation) .