ECONOMICS PACKAGE (APSU)>CUSTOM<
ECONOMICS PACKAGE (APSU)>CUSTOM<
17th Edition
ISBN: 9781323403891
Author: Hubbard
Publisher: PEARSON C
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Chapter 30, Problem 30.2.6PA

Subpart (a):

To determine

The relation between domestic interest rate and value of domestic currency and the meaning of “strengthening of the dollar”.

Subpart (b):

To determine

The relation between domestic interest rate and value of domestic currency and the meaning of “strengthening of the dollar”.

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The US economy slowed down sharply in the latter half of 2000, and the actual recession started early in 2001. Monetary policy eased sharply throughout 2001, and for the first half of the year, fiscal policy did not change very much. Yet the dollar continued to appreciate in the first half of the year. It then fell sharply during the third quarter, but rebounded in the fourth quarter and returned to its highs in February 2002. It then fell 12% during the next five quarters. Why did the dollar remain strong throughout the recession, and why did it then decline sharply in 2002 even though fiscal policy became more expansive?  
Suppose the Federal Reserve wants to fix the U.S. exchange rate with the yen at $0.008 per yen. If the equilibrium market exchange rate were significantly lower at $0.007 per yen, what would the Fed need to do to maintain the fixed rate of $0.008 per yen? What would be the effect of these actions on the money supply in the U.S.? Explain.
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