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Question 1. International trade represents the sale and trade of goods, services and capital across international...

Question 1. International trade represents the sale and trade of goods, services and capital across international border. If interest rate increase in USA, what is the impact on today international trade? Will it affect the foreign exchange rate and will it shift the supply and demand of products?

could you please elaborate the answer in 2-3 pages please.

Thanks.

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Answer #1

If interest rates in US increase, then investors will start putting their money in USA.

As a result of this, demand for US dollars will increase, thereby leading to its exchange rate appreciation.

As a currency appreciates, foreign currencies will be able to purchase less dollars in exchange. This will lead to fall in demand for US goods, thereby leading to a fall in US exports while imports will become cheaper. This will then eventually lead to a fall in net exports and thus current account deficit.

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