Question

IN NEED OF A DETAILED ANSWER!!

Question 1- Learning to draw and label the graphs correctly and then explaining the changes in the economy is key to scoring high on this question.

Scenario

The Federal Reserve decreases the money supply in the United States causing interest rates to increase.

Explain how the change in interest rates will affect United States aggregate demand. (Make sure to include the determinant that causes the change in aggregate demand in your explanation.)

Show and explain how the increase in interest rates will affect the international value of the United States dollar and the foreign dollar. (Make sure you use the concepts of supply and demand and financial capital in your explanation.)

Answer 1

As interest rate rise from io to i1 in fig 1 due to tight monetary policy, investment falls from i1 to io. This shifts aggregate demand curve downwards in fig 2 from AD to ADo

Increase in interest rate will led foreign investors to invest more in usa to earn higher interest rate. Things foreign capital inflow increases. They invest usually in dollars in USA. Thus demand for dollars will rise from Do to D1. As a result usa dollar will appreciate from 4 euro per dollar to 5 euro per dollar(say). On the other hand foreign currencies like Canadian dollar will depreciate