Explain how an easing of monetary policy works through the exchange rate and what potential impact on the economy this would have.
What will be an ideal response?
An easing of monetary policy lowers the target nominal interest rate, which lowers the real interest rate. The lower real interest rate will cause the demand for dollars to weaken, lowering its value. The lower value of the dollar will cause an increase in net exports, since exports will increase and imports decrease.
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Refer to Figure 24-1. Ceteris paribus, an increase in personal income taxes would be represented by a movement from
A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A.
Targeting the federal funds rate allows the Fed some ability to control bank reserves and thus the money supply. Explain how each of the following tools allows the Fed to fine-tune its control of bank reserves
a. Conducting open market operations b. Changing the discount rate c. The ability to pay interest on reserves d. The Term Deposit Facility
If foreigners are restricted in their ability to buy investments in a country then that government is imposing:
A. controls on capital inflows. B. fixed exchange rates. C. controls on capital outflows. D. controls on both capital inflows and outflows.
In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?