Lecture 21
INTEREST RATES, EXCHANGE RATES AND NET EXPORTS
1. Exchange rates and Interest rates
- In the short run, exchange rates are influenced by interest rates
- If R in the United States rises:
- Foreigners will wish to invest in dollar-denominated securities
[Increased capital inflows into the U.S.]
- Demand for dollars will increase (in the foreign-exchange market)
[Not to be confused with the money market!]
- Result: The dollar will [appreciate / depreciate]
2. Exchange rates and Net exports
- Exports and imports are affected by changes in the value of the domestic currency
- Suppose the U.S. dollar appreciates
- This makes U.S. goods more expensive to foreign consumers...
... and foreign goods cheaper for American consumers
- Result: U.S. net exports will [increase / decrease]
3. Questions
- If the Federal Reserve reduces interest rates in the U.S., the dollar will [appreciate / depreciate], causing net exports to [rise / fall]. Explain.
- If the Japanese interest rate rises, the dollar will [strengthen / weaken] relative to the yen.
- What are the other factors, in addition to a currency depreciation, that will lead to:
- An increase in exports?
- A decrease in imports?