Question

1. Explain three factors that would cause the dollar to appreciate.

2. What is fiat money? Why is fiat money important in the United States today?

3. What is the impact of expansionary fiscal policy on the exchange rate? Explain the process through which expansionary fiscal policy affects the exchange rate.

4. Discuss the opposing points of view on U.S. trade deficit.

5. Describe the origins of the Fed and the arguments about the independence of the Fed.

Answer 1

1.

There are a variety of economic factors that would cause to appreciate the Dollar. These are as follows-

• Monetary Policy- The Federal Reserve allows monetary policies to increase strength or weaken the dollar. The dollar is a fiat currency so it is not backed by silver or gold. Law of supply and demand works when more money is produced and the existing money becomes less valuable.
• Slowing growth- The effect of a strong economy is strong currencies and a weak economy is weak currencies. The decrease in investor's interest leads to weakening the economy.
• Inflation- Us dollars and trading partners are inversely proportional. Inflation means the cost of goods and products is increasing. The export price of such goods is very high. Increase in price decrease demand. Common people become more attracted to imported products to purchase.

2.

• The currency without intrinsic value is termed as fiat money. It is an alternative to representative and commodity money. It has no use-value because Govt controls its value.
• The U.S uses fiat money as it differs from money and its value is supported by physical commodities like silver and gold(commodity money).

3.

• Expansionary fiscal policy increases selling bonds and government borrowing in the special sector.
• It increases demand and production.
• It increases the aggregate demand by lowering the tax.

4.

A trade deficit happens when the country's economic value exceeds the value of import and export. It happens when the cost price exceeds the selling price. The trade deficit is not a problem in the U.S economy but the large scale of trade deficit may hamper the stronger economy. It melts the global economy leading the U.S deficit to the global economy. High interest rates attract foreign investors to invest their money in the United States.

5.

• The FED was first established by Congress(23rd Dec 1913) a century ago. It serves as the U.S central bank. It was approved by the President Woodrow Wilson.
• The monetary policy is very important and the technical policy is determined by the politicians. This is the main argument. The FED is controlled by the elected officials which increases the political cycle. Those who talk against the independence of FED declares that the elected officials create public policy in a democracy. Someone argues that the control of the officials helps in integrating and coordinating the monetary policy.