An increase in the real exchange rate A) makes imports more ...

[clmills979]

An increase in the real exchange rate
 
  A) makes imports more expensive.
  B) makes imports less expensive.
  C) does not affect import values.
  D) always makes the number of imports rise.
  E) makes domestic consumers spend more on only foreign imports.

Question 2

Combine a graph showing the interest parity condition and one showing money demand and supply to demonstrate simultaneous equilibrium in the money market and the foreign exchange market. How would an increase in the U.S.
 
  money supply affect the Dollar/Euro exchange rate and the U.S. interest rate? Illustrate your answer graphically and explain.

[mcinincha279]

Answer to Question 1

A

Answer to Question 2

Above the axis is depicted the foreign exchange market, where changes in the rate of return on the dollar are mapped into changes in the exchange rate. Below the axis is depicted the U.S. money market and shows the relation between the rate of return on the dollar and U.S. real money holdings. The mechanism works as follows. Consider an increase in the U.S. real money holdings. Supply and demand dictate that the demand for money must increase, so the rate of return must lower to equilibrate at point 2. The lower rate of return on the dollar will cause the dollar to depreciate (exchange rate moves to point ).

[clmills979]

Excellent

[vickybb89]

TYSM