Consider the models below. Analyze the effects of the following events on (i) in
ID: 1109901 • Letter: C
Question
Consider the models below. Analyze the effects of the following events on (i) interest rate of US, (ii) interest rate of EZ and (iii) $/€ exchange rate.
a. There is an economic boom in the US, which increases US income.
b. The Fed decides to decrease the money supply.
c. The ECB choose to print more money.
Money Market/Exchange Rate Linkages United States Federal Reserve System Europe European Central Bank (European MS (United States USmoney supply E money supply) U.S. money market European money market ForeignRe exchange market (Dollar interest rate) (Euro interest rate) (Dollar/euro exchange rate)Explanation / Answer
A) when there is a economic Boom interest rate decreases of US and interest rate will increase for EZ and exchange rate is also decrease.
B) decrease in the money supply will increase the rate of interest of us and decrease the rate of interest for EZ and hence the exchange rate will increase.
C) printing more money will create inflation in the economy so it will decrease the rate of interest for us as we have a vice versa with inflation and rate of interest and it will increase the rate of interest for EZ and hence the exchange rate will fall.