Explain how the money markets of two countries are linked through ...

[Kthamas]

Explain how the money markets of two countries are linked through the foreign exchange market.
 
  What will be an ideal response?

Question 2

What can one learn from the following figure?
 
  What will be an ideal response?

[ong527]

Answer to Question 1

The monetary policy actions by the Fed affect the U.S. interest rate, changing the dollar/euro exchange rate that clears the foreign exchange market. The European System of Central Banks (ESCB) can affect the exchange rate by changing the European money supply and interest rate.

Answer to Question 2

The figure shows the U.S. current account and net foreign wealth from 1977 until 2008. It shows that a string of current account deficits in the 1980s reduced America's net foreign wealth until, by the end 2008, the country had accumulated a substantial net foreign debt. In 1987 the country became a net debtor to foreigners for the first time since World War I.