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Change in US Exchange rates based on political changes

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7. The President of the U.S. announces that he will reduce inflation with a new anti-inflation program. If the public believes him, predict what will happen to U.S. exchange rates.

11. If American auto companies make a breakthrough in automobile technology and are able to produce acar that gets 60 miles to the gallon, what will happen to the U. S. exchange rates?

13. If the expected inflation drops in Europe so that international rates fall there, predict what will happen to the US. exchange rates.

15. If there is a strike in France, making it harder to buy French goods, what will happen to the value of the euro?

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Use appropriate diagrams.

7. The president of the U.S. announces that he will reduce inflation with a new anti-inflation program. If the public believes him, predict what will happen to U.S. exchange rate.

Assuming that the domestic interest rates do not change, we can expect that the dollar will appreciate. Because expected U.S. inflation falls as a result of the announcement, there will be an expected appreciation of dollar or an expected depreciation of the foreign currency. The expected return on foreign deposits will fall. The RF curve thus shifts in to the left and the equilibrium exchange rate rises.

However, the nominal interest rates can ...

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