Question

Suppose the U.S. economy slips into a recession. In response, the Federal Reserve cuts the federal...

Suppose the U.S. economy slips into a recession. In response, the Federal Reserve cuts the federal funds rate in order to avoid unemployment. Consider what happens to the following under a floating exchange-rate regime.

     a. Domestic investment would  (Click to select)  increase  decrease  be unchanged  .

     b. Capital inflow would  (Click to select)  decrease  be unchanged  increase  .

     c. Capital outflow would  (Click to select)  increase  decrease  be unchanged  .

     d. The exchange rate would  (Click to select)  increase  be unchanged  decrease  .

     e. Net exports would  (Click to select)  increase  be unchanged  decrease  .

     f. Aggregate demand would  (Click to select)  be unchanged  decrease  increase  .

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Answer #1

There is a recession. In response, the Federal Reserve cuts the federal funds rate and there is a floating exchange-rate regime.

     a. Domestic investment would increase as interest rate would fall

     b. Capital inflow would decrease because investors will move out once they see falling interest rates

     c. Capital outflow would increase capital is moved out due to the investors investing in other countries when

they see falling interest rates

     d. The exchange rate would decrease or depreciate as demand for USD falls or supply of US rises

     e. Net exports would increase

     f. Aggregate demand would increase

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