Why would lowering its own interest rates affect a nation's exchange rate?
a. International interest arbitrage (the ability to borrow in low-rate markets and deposit in higher-rate markets) would cause investors to sell domestic currency assets and purchase foreign assets based in other currencies.
b. A nation's central bank controls both interest rates and exchange rates. Unfortunately, they do not have sufficient funds to take care of both at the same time.
c. When interest rates fall, borrowing is cheaper, spending and GDP rise and so do exports, thus causing the exchange rate to appreciate.
d. In the short run, exchange rates have to adhere to PPP; otherwise, traders will make profits by purchasing in the cheap market and selling in the more expensive
market, thus aligning exchange rates at the proper level
Ans: a. International interest arbitrage (the ability to borrow in low-rate markets and deposit in higher-rate markets) would cause investors to sell domestic currency assets and purchase foreign assets based in other currencies.
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The expenditure approach to measuring U.S. GDP equals _________
A. the sum of U.S. consumption expenditure and U.S. investment B. U.S. government expenditure minus taxes paid by Americans C. all expenditure on final goods and services produced in the United States in a given time period D. all expenditure by Americans on goods and services produced in the United States in a given time period
Crowding out suggests that
A) high taxes reduce both consumption and saving. B) increases in consumption are always at the expense of saving. C) increases in government spending may raise the interest rate, thereby reducing investment. D) increases in government spending will close a recessionary gap.