Impact of USD Depreciation on US Trade Balance

Very Hard International Economics Exchange Rates

Consider a hypothetical scenario where the Exchange Rate between the US Dollar (USD) and the Euro (EUR) fluctuates significantly due to changes in economic conditions. Assume that the US experiences a rising inflation rate while the Eurozone maintains stable prices.

If the US Dollar depreciates against the Euro as a result, which of the following options accurately describes the expected impact on the trade balance between the US and the Eurozone?

The US trade balance will improve as US goods become cheaper for Eurozone consumers.

The US trade balance will worsen as US consumers will import more expensive Eurozone goods.

The US trade balance will remain unchanged, as exchange rate fluctuations have no effect on trade.

Hint

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