Discuss the effects of a rise in the dollar interest rate on the exchange rate
What will be an ideal response?
There are two effects to consider. A rise in the interest rate offered by dollar deposits combined with a constant expected exchange rate will cause the dollar to appreciate (see Figure 14-5 from the text). However, the expected exchange rate will likely change. As Figure 14-6 from the text shows, if the expected exchange rate increases, the dollar will depreciate.
Figure 14-5
Figure 14-6
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Suppose that an Italian working in the United States renounces his Italian citizenship and is granted U.S. citizenship. Which of the following will happen?
A. Italian GDP will fall; U.S. GNP will rise. B. Italian GNP will fall; U.S. GNP will rise. C. Italian GDP will fall; U.S. GDP will rise. D. Italian GNP will fall; U.S. GDP will rise.
If the quantity supplied responds only slightly to changes in price, then
a. supply is said to be elastic. b. supply is said to be inelastic. c. an increase in price will not shift the supply curve very much. d. even a large decrease in demand will change the equilibrium price only slightly.