Exchange rate quotations can be quoted in two ways, direct quotation and indirect quotation.

Direct quotation is when the one unit of foreign currency is expressed in terms of domestic

currency. On the other hand, the indirect quotation is when one unit of domestic currency as

expressed in terms of foreign currency.

a) If the Euro depreciates against the U.S dollar, can a U.S. dollar buy more or fewer euros as

a result? Explain. (4 Marks)

b) If the United States imports more goods from abroad than it exports, foreigners will tend to

have a surplus of U.S. dollars. How will this do to the value of the dollar with respect to

foreign currencies? Briefly explain the corresponding effect on foreign investments in the

United States. (4 Marks)