If the United States imports more goods from abroad than it exports, then foreigners will tend to have a surplus of U.S. dollars. What will this do to the value of the dollar with respect to foreign currencies? What is the corresponding effect on foreign investments in the United States?

Explanation

If the United States imported more goods than it exported, this would result in the US dollar getting weaker or depreciating in value. The reason for this is that foreign markets will end up with a surplus of US dollars, which will mean the supply of dollars will go up. The economic principle of supply and demand states that when there is an increase in supply without a corresponding increase in demand, the value of an asset goes down. If foreign markets were to invest more in American products, then the US would have a surplus of foreign currencies and the foreign markets would have a shortage of US dollars. This would also result in the foreign markets' currency depreciating, making a stronger US dollar.

Sample Response

When dealing with currency exchanges, the basic economic theory of supply and demand applies. A surplus of dollars would cause a decrease in value of the currency. The same effects would happen to other currencies investing into the US.