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Author Question: What do reports that the dollar is overvalued mean? How will foreign exchange markets respond to ... (Read 94 times)

ETearle

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on: Jun 29, 2018
What do reports that the dollar is overvalued mean? How will foreign exchange markets respond to this information? Support your answer graphically.
 
  What will be an ideal response?

Question 2

What two factors are the keys to determining labor productivity?
 
  A) technology and the quantity of capital per hour worked
  B) the growth rate of real GDP and the interest rate
  C) the average level of education of the workforce and the price level
  D) the business cycle and the growth rate of real GDP


Christopher

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Reply #1 on: Jun 29, 2018
Answer to Question 1

If the dollar is overvalued, that means that the current exchange rate (foreign currency per dollar) is greater than the relative purchasing power of the dollar. This implies that currency traders will reduce their holdings of dollars (the supply curve for dollars will shift to the right) and increase their holdings of other currencies against which the dollar is overvalued. As the supply of dollars increases, the exchange rate will fall. The exchange rate will continue to fall until the dollar's value accurately reflects its relative purchasing power.

Answer to Question 2

A


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