A rise in interest rates tends to contract the economy by appreciating the currency and reducing net exports. Provide the reasoning behind this conclusion.
What will be an ideal response?
Interest rate differentials and capital flows are typically the most important determinants of exchange rate movements. Suppose interest rates in the United States rise while foreign interest rates remain unchanged. This change in relative interest rates will attract capital to the United States and cause the dollar to appreciate. An appreciating dollar will, in turn, reduce net exports, prices, and output in the United States.
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Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank. If the required reserve ratio is 10 percent, what is the maximum change in money supply?
A) -$200 million B) -$180 million C) $2 million D) $180 million E) $200 million
If the price of new automobiles rises in the U.S. market while prices remain unchanged in foreign markets,
a. foreign firms will want to export fewer automobiles to the United States b. foreign firms will want to export more automobiles to the United States c. foreign firms will not change their exports to the United States since it is a different market d. U.S. firms will want to export more automobiles to foreign markets e. U.S. firms will not change their exports to foreign markets unless foreign prices also change
The trade deficit is the mirror image of the required capital inflows. So why worry about these capital inflows?
a. Trade deficits automatically cause larger budget deficits. b. Before long, the Germans, Japanese, and other foreigners will own the United States and will be dictating policy to the U.S. government. c. These capital inflows create debts on which interest and principal payments will have to be made in the future. d. During the period of trade deficits, personal consumption must be reduced to build up wealth to repay the debt created.
Which of the following describes the effect of government spending?
A. Govt spending increases, taxes increase, disposable income increases, consumption decreases, AD decreases, price and quantity decrease B. Govt spending increases, money supply increases, income decreases, investment increases, AD increases, price and quantity decrease C. Govt spending increases, AD increases, price and quantity increase D. Govt spending increases, consumption increases, AD increases, price and quantity decrease