How will an interest rate increase in the United States affect equilibrium in the market for dollars against foreign currencies? (Assume the exchange rate is stated in terms of foreign currency per U.S. dollar.)
A) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded will increase.
B) The equilibrium exchange rate will decrease, and the equilibrium quantity of dollars traded cannot be determined.
C) The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded will increase.
D) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded cannot be determined.
Question 2
If the Federal Reserve announces that its target for the federal funds rate is falling from 3 percent to 2.25 percent, how do you expect workers and firms to react?
A) As long as the Fed's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation.
B) As long as the Fed's announcement is credible, workers and firms will decrease their consumption and investment spending, which will decrease aggregate demand and inflation.
C) Workers and firms will incorporate the decrease in interest rates into their expectations of inflation, and they will expect inflation to fall as a result of Fed's policy announcement.
D) If the Fed's announcement is not credible, workers and firms will not expect inflation to rise so they will increase their consumption and investment spending, which will decrease aggregate demand and increase inflation.
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