Assume the country of Sluban ties its currency (the slu) to the dollar and the exchange rate will remain fixed. Sluban has frequent trade with countries in the eurozone and the United States. All traded products can easily be produced by all the countries, and the demand for these products in any country is very sen- sitive to the price because consumers can shift to wherever the products are relatively cheap. Assume that the euro depreciates substantially against the dollar during the next year.
a. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the eurozone? Explain.
b. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the United States? Explain.