A significant decline in the exchange rate of the U.S. dollar generally will have which of the following effects?
Fluctuations in currencies' exchange rates are based on the relative changes in the supplies and demands of those currencies. Companies considering decisions regarding short-term international trade (ie, imports and exports) and long-term international investments face exchange-rate risksThe risk that exists when there is an unfavorable change (due to fluctuations) in the exchange rate before a transaction is completed. This risk consists of transaction risks, translation risks, and economic risk. Exchange rate risk is also known as currency risk.  as a result of these changes.
A significant decline in the exchange rate of the U.S. dollar (USD) means that the USD has depreciated A currency condition in which one currency is worth less than it was relative to another currency. In other words, it now costs more to purchase the same number of foreign currency units., and foreign currencies have appreciated. In other words, foreign entities will be able to purchase more units of the USD for less cost. This makes exports from the U.S. highly desirable because the relative cost of those exports has fallen (Choice A).
However, since the USD now purchases less, the cost of imports from foreign countries has risen relatively; consumers will have to pay more for those imports (Choice D). Accordingly, one would expect that U.S. importers will suffer from the depreciated USD (Choice B).
Things to remember:
When the U.S. currency depreciates against a foreign currency, U.S. export prices will fall and export sales will increase relatively. In other words, the value of the U.S. dollar will be less, benefitting U.S. exporters.
