Question

Which of the following statements are true, and which are false? Explain your answers in one or two sentences.

An increase in the U.S. real interest rate will cause the dollar exchange rate to decline.

The central bank typically raises the real interest rate when inflation rises.

A higher real interest rate leads to greater net exports because the higher interest rate raises the value of the dollar.

Answer 1

1) false. because when there is an increase in the u.s interest rate then it means that returns on investment is higher in u.s, so, there will be capital inflows in u.s from other countries, which increases demand for u.s dollars and due to increase in demand of u.s dollars, value of dollar exchange rises.

2) false because increase in real interest rate decreases investment and as a result aggregate demand falls. so, central bank do not raise real interest rate during inflation.

3) false. baecause higher real interest rate means returns on investment is more, so there will be capital inflows which increases demand of dollars and increases the value of dollars. so, foreign goods become cheaper , so they will buy from foreign. it means that import increases which decreases net exports