Question

Over the last 10​ years, the dollar has depreciated sharply​ vis-à-vis the euro. Suppose that in...

Over the last 10​ years, the dollar has depreciated sharply​ vis-à-vis the euro. Suppose that in the short run the Fed wanted both to defend the dollar​ (that is, stop its decline​ and/or cause it to​ appreciate) and stimulate investment.

Can it achieve both of these goals simultaneously through monetary​ policy?  

A.

​Yes, to stimulate investment the Fed will use expansionary policy that will raise interest rates. The higher interest rates will reduce investment into the United​ States, which will decrease the demand for dollars and cause an appreciation of the dollar.

B.

​No, to stimulate investment the Fed will use expansionary policy that will lower interest rates. The lower interest​ rates, however, will reduce investment into the United​ States, which will increase the supply of dollars and cause a depreciation of the dollar.

C.

​No, to stimulate investment the Fed will use expansionary policy that will raise interest rates. The higher interest​ rates, however, will reduce investment into the United​ States, which will increase the demand for dollars and cause a depreciation of the dollar.

D.

​Yes, the policy tools needed to stabilize the currency are not related to the policy tools that are used to stimulate investment.

Suppose instead that the European Central Bank​ (ECB) conducts expansionary monetary policy.

What is the​ short-run effect, if​ any, of this policy on the​ euro/dollar nominal exchange rate and on the real exchange rate between the United States and the European Monetary​ Union?

A.

The nominal dollars per euro exchange rate will decrease and the real exchange rate will decrease as long as inflation in the European Monetary Union is higher than inflation in the United States.

B.

The nominal dollars per euro exchange rate will increase and the real exchange rate will increase as long as inflation in the European Monetary Union is higher than inflation in the United States.

C.

The nominal dollars per euro exchange rate will decrease and the real exchange rate will decrease as long as inflation in the European Monetary Union is not significantly higher than inflation in the United States.

D.

The nominal dollars per euro exchange rate will increase and the real exchange rate will increase as long as there is no inflation in either country.

Homework Answers

Answer #1

a) "B"

​No, to stimulate investment the Fed will use expansionary policy that will lower interest rates. The lower interest​ rates, however, will reduce investment into the United​ States, which will increase the supply of dollars and cause a depreciation of the dollar.

b) "C"

The nominal dollars per euro exchange rate will decrease and the real exchange rate will decrease as long as inflation in the European Monetary Union is not significantly higher than inflation in the United States.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Right now, the US dollar is relatively close in value to the euro ($1.10 = 1...
Right now, the US dollar is relatively close in value to the euro ($1.10 = 1 e). There is some speculation that we may be seeing some inflation in the United States in the near future. If the rate of inflation stays the same in the European Union and increases in the US, what can we expect will happen to the exchange rate between the Euro and the US dollar? Moreover, suppose that central banks neither in the United States...
Monetary policy is more effective if: A. the inflation rate in the country has hovered close...
Monetary policy is more effective if: A. the inflation rate in the country has hovered close to zero for the last three years because nominal interest rates will be lower so expansionary monetary policy will be more effective. B. the inflation rate in the country has averaged 3 percent for the last three years because nominal interest rates will be lower so expansionary monetary policy will be more effective. C. the inflation rate in the country has averaged 3 percent...
Consider the Euro-dollar exchange rate (nominal exchange rate = Euros/$US). For each of these examples, use...
Consider the Euro-dollar exchange rate (nominal exchange rate = Euros/$US). For each of these examples, use a supply/demand diagram for the foreign exchange market to show the impact on the exchange rate. In each case, does the exchange rate appreciate or depreciate? a. A debt crisis in Europe causes investors holding Euro denominated securities to move to dollar denominated securities. b. The European Central Banks raises interest rates, attracting inflows from U.S. financial investors into European markets. c. The European...
a. Monetary Policy involves changing taxes and government spending/ the design of currency/ exports/ the money...
a. Monetary Policy involves changing taxes and government spending/ the design of currency/ exports/ the money supply.   In the United States, Monetary Policy is implemented by the Federal Reserve/ President and Congress/ Secretary of the Treasury/ states. b. Contractionary Monetary Policy/ Lower prices/ Expansionary MonetaryPolicy/ Larger coins can be used to address a Recessionary Gap; while Expansionary MonetaryPolicy/ smaller coins/ Contractionary Monetary Policy/ higher prices can be used to address an Inflationary Gap. c.  To enact Contractionary Monetary Policy, the central bank...
Dollar Return on Foreign Investments - (A) Over the past year, the dollar has depreciated by...
Dollar Return on Foreign Investments - (A) Over the past year, the dollar has depreciated by about 10 percent against the euro. A year ago you took out a home equity loan in the U.S. at an interest rate of 8 percent and you invested the money in a German mutual fund that paid a 5 percent euro return. What net return did you earn on all of these transactions over the year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM)....
4- What is it called when the Fed takes actions that result in an increase in...
4- What is it called when the Fed takes actions that result in an increase in the money supply? A. Contractionary fiscal policy B. Expansionary fiscal policy C. Contractionary monetary policy D. Expansionary monetary policy 5. If the federal government finances a deficit by borrowing, we can expect A. National debt will decrease B. More income taxes will be collected C. Higher interest rates due to the higher demand for loanable funds D. Higher Inflation in the economy E. All...
QUESTION 9 A strong dollar places ____ pressure on inflation, which in turn places ____ pressure...
QUESTION 9 A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar. a. downward; downward b. ​downward; upward c. upward; upward d. upward; downward 2 points QUESTION 10 The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar's value is expected to: a. remain stable b. strengthen c. weaken d. None of these will have an impact on inflation. 1 points QUESTION 11 A weaker dollar...
5.           If the U.S. government wants to strengthen the dollar, it can: a)have the Fed use...
5.           If the U.S. government wants to strengthen the dollar, it can: a)have the Fed use monetary policy to reduce interest rates, thereby increasing capital flows into its country. b)reduce the supply of dollars on the international currency market by limiting the right of U.S. citizens to buy foreign currencies. c)have the Fed buy foreign currency, paying for it with newly printed dollars. d)Answers (a), (b), and (c) will all help the government to set the exchange rate at its...
1. Exchange rates are equalized in different locations due to: a. arbitrage. b. government intervention in...
1. Exchange rates are equalized in different locations due to: a. arbitrage. b. government intervention in foreign exchange markets. c. free trade in goods and services. d. the actions of importers and exporters. 2. How can one profit through arbitrage if the dollar per euro exchange rate in London is $2 per pound while in New York is $1.95 per pound? a. Buy dollars in New York and sell them in London b. Buy pounds in London and sell them...
1. You observe that one U.S. dollar is currently equal to 3.6 Brazilian reals in the...
1. You observe that one U.S. dollar is currently equal to 3.6 Brazilian reals in the spot market.  The one year US interest rate is 7% and the one year Brazilian interest rate is 4%. One year later, you observe that one U.S. dollar is now equal to 3.2 Brazilian reals in the spot market. You would have made a profit if you had: Borrowed U.S. dollars and invested in U.S. dollars Borrowed Brazilian reals and invested in Brazilian reals Borrowed...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT