a. Suppose the Federal Reserve raises the federal funds rate in the United State
ID: 1102238 • Letter: A
Question
a.
Suppose the Federal Reserve raises the federal funds rate in the United States but people believe that the inflation rate will rise by more than the Fed raised the federal funds rate. What do you expect to happen to the exchange rate? Explain why.
b.
As the exchange rate changes in the direction you determined in part a, what happens to the prices of imports and exports in the United States and in other countries? Explain.
c.
What happens to net exports in the United States and in other countries that trade with the United States in the short run? In the long run? Explain.
a.
Suppose the Federal Reserve raises the federal funds rate in the United States but people believe that the inflation rate will rise by more than the Fed raised the federal funds rate. What do you expect to happen to the exchange rate? Explain why.
b.
As the exchange rate changes in the direction you determined in part a, what happens to the prices of imports and exports in the United States and in other countries? Explain.
c.
What happens to net exports in the United States and in other countries that trade with the United States in the short run? In the long run? Explain.
Explanation / Answer
1)
ans)
Well, the answer to this lies in the economic situation of the country.
I am taking the example of falling exchange rate:-
A falling exchange rate can be beneficial if the economy is uncompetitive and stuck in a recession. A devaluation helps to increased demand for exports and create jobs. In a recession, inflation is unlikely to be a problem. However, in a boom, a devaluation could lead to inflation. Also, a devaluation does reduce living standards as imports become more expensive.
2)
ans)
Well, for this case I am considering the effect of falling exchange rate on UK economy:-
What does this Depreciation in the value of the Pound mean?
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