17) When the U.S. dollar appreciates, A) foreign residents demand more of U.S. g

Question

17) When the U.S. dollar appreciates, A) foreign residents demand more of U.S. goods, and U.S. residents desire to purchase more foreign goods. B) foreign residents demand more of U.S. goods, and U.S. residents desire to purchase fewer foreign goods. C) foreign residents demand fewer of U.S. goods, and U.S. residents desire to purchase more foreign goods. D) foreign residents demand fewer of U.S. goods, and U.S. residents desire to purchase fewer foreign goods. 18) The net-export effect of contractionary monetary policy is A) the depreciation of the value of the dollar and a resulting increase of U.S. net exports. B) the depreciation of the value of the dollar and a resulting decrease of U.S. net exports. C) the appreciation of the value of the dollar and a resulting increase of U.S. net exports. D) the appreciation of the value ofthe dollar and a resulting decrease of US.net exports.

Explanation / Answer

17) If the dollar appreciates (the exchange rate rises), the relative price of domestic goods and services become more expensive while the relative price of foreign goods and services decrease. The same dollar can now purchase higher units of the foreign currency as the excange rate has risen and as a result it will demand more of foreign goods as they are cheaper now. Thus the answer is C:foreign residents demand fewer of U.S. goods and U.S. residents desire to purchase more foreign goods.

18) Monetary contraction pulls money out of the economy and the main purpose of a contractionary monetary policy is to slow down the rampant inflation that accompanies a booming economy. As a result, Contractionary monetary policy

1)Causes a decrease in bond prices and an increase in interest rates. Higher interest rates result in lower level of capital investment.

2)Higher interest rate makes domestic bond more attractive leader to higher demand for doemstic bonds and thus the demnd for doemstic currency rises and the demand for foreign currency falls. This leads to an appreciation of the exchange rate.(The value of the domestic currency is now higher relative to foreign currencies)

3) Higher exchange rate leades to fall in exports as exports become more expensive.

Thus the answer is D: appreciation of the value of the dollar and a resulting decrease of U.S. net exports

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