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Scenario 1

The United States economy is growing at a faster rate than any of its trading partners.
As a result, inflation is increasing.
a. Show and explain how the increase in inflation will affect the international value
of the United States dollar and the foreign dollar. (Make sure you use the
concepts of supply and demand and the cost of domestic goods in your
explanation.)
The increase in inflation will lead for the U.S. dollar to have a lesser value than
the foreign dollars. This is because inflation makes the U.S. dollar depreciate,
meaning it takes less of the foreign dollars to purchase and American good, and
it takes more U.S. dollars to purchase a foreign good. This means that exports
will increase, and imports will decrease. Supply will increase because it takes
more dollars to purchase the foreign currency. On the other hand the demand for
the foreign money would increase.
b. Explain how the changing value of the dollar will affect United States exports and
imports. (Make sure you use the concepts of the cost of foreign and domestic
goods in your explanation.)
Since it will take more of the U.S. dollars to purchase a foreign good, the demand
for foreign goods will decrease, but the demand for U.S. goods from foreign
countries will increase. The exports of the U.S. will also increase since it takes
less foreign dollars to purchase an American good, and the imports will decrease
because foreign goods will appear more expensive to the Americans.
Scenario 2
The Federal Reserve decreases the money supply in the United States causing interest
rates to increase.
a. Show and explain how the increase in interest rates (and the international value
of the dollar) will affect the international value of the United States dollar and the
foreign dollar. (Make sure you use the concepts of supply and demand and
financial capital in your explanation.)
Since the interest rate will increase (this means the dollar has been appreciated)
the foreign investors will rush to invest and provide more of their foreign dollars to
meet the dollar. Therefore the supply of foreign dollars would increase, and the
demand for the dollar itself would also increase.
b. Explain how the change in interest rates will affect United States aggregate
demand. (Make sure to include the determinant that causes the change in
aggregate demand in your explanation.)
Aggregate demand would decrease, since there is taxation. The American
population is not going to want to pay those taxes, hence demand will decrease.
As prices and taxes increase the demand drops and vise versa.

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