Using a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of an increase in the U.S. money supply on the dollar/euro exchange rate
What will be an ideal response?
An increase in the U.S. money supply will cause interest rate to decrease. This should increase investment and possibly consumption of durable goods. The reduction in the interest rate will cause a movement to the left along the schedule depicting the expected euro return expressed in dollar. The result is an increase in E or a depreciation of the dollar.
You might also like to view...
When the real exchange rate decreases in the United States, then there is a(n) in U.S. demand for U.S. goods and a(n) in U.S. demand for Mexican goods.
a. decrease; increase b. increase; decrease c. increase; increase d. decrease; decrease
The largest item in the government's poverty program is
a. cash aid b. medical benefits c. food stamps d. housing benefits e. jobs and training programs