(a) If the European Central Bank pursues a contractionary monetary policy, will the U.S. dollar appreciate...

(a) If the European Central Bank pursues a contractionary monetary policy, will the U.S. dollar appreciate or depreciate. Include the relevant graph and a brief explanation. You must use the asset-market approach to exchange rate determination in answering this question.

(b) How will this change in the value of the dollar affect U.S. net exports? Explain your answer briefly.

Expert Solution

a). If the European Central Bank pursues a contractionary monetary policy, then the US dollar will depreciate. This is because a contractionary monetary policy will shift the supply for Euro to the left, thereby leading to a higher equilibrium exchange rate of euro as against dollar.

b) This change in the value will lead to higher net exports. This is because the depreciation of the dollar would mean that for every euro that the exporter received by selling a product, the number of dollars that the exporter gets per unit sold will now be higher. Thus, now since exporter has a higher chance of getting more dollars by selling the same quantity of products, the exporter will want to expert more and thus increase the total exports. Also, the demand for imports will reduce in this case because now importing one unit of the same product would mean paying more dollars. Thus, there will be an increase in the total exports and reduction in total imports, thereby leading to higher net exports( Total Exports - Total Imports)

Rahul Sunny answered 2 years ago

1. If the federal reserve pursues a contractionary monetary policy, output and the price level will...

1. If the federal reserve pursues a contractionary monetary policy, output and the price level will change in which of the following ways in the short run? A) Output – Increase; Price Level - Increase B) Output - Increase; Price Level - No change C) Output - Increase; Price Level - Decrease D) Output - Decrease; Price Level - Decrease E) Output - Decrease; Price Level - Increase 2. To counteract a recession, the Federal Reserve should buy securities on...

compare and contrast the monetary policy issues faced by the european central bank and Federal reserves...

compare and contrast the monetary policy issues faced by the european central bank and Federal reserves of USA. compare and contrast the approaches to monetary policy of european central bank and the FED of USA

a. Explain the short-run effects of contractionary monetary policy by the Fed on the dollar/euro exchange...

a. Explain the short-run effects of contractionary monetary policy by the Fed on the dollar/euro exchange rate. b. During periods of international geopolitical tension or economic crisis, there is often a “flight to quality.” In terms of the forex market, that basically means that investors rush to convert their assets into dollars, or dollar-denominated assets. Show the likely effect on the dollar/euro exchange rate.

Monetary Policy: There are two types of Monetary policies: Expansionary monetary policy and contractionary monetary policy....

Monetary Policy: There are two types of Monetary policies: Expansionary monetary policy and contractionary monetary policy. Key-Questions: 1. Explain each of the key terms in not more than one or two sentences (give formula or examples whichever is applicable): (a) Overnight rate of interest (b) Bank rate (c) Money multiplier (d) open market operations. 2. Discuss about the impact of each policy on the supply of money and inflation with suitable explanation and example. 3. Give a graphical explanation of...

Central banks like the Reserve Bank of New Zealand and the U.S. Fed set monetary policy...

Central banks like the Reserve Bank of New Zealand and the U.S. Fed set monetary policy with a dual mandate: to maintain price stability and support maximum sustainable employment. However, maximum employment does not mean that every able man or woman must have a job, and stable prices do not mean average measured inflation is exactly zero, so the policy mandate sounds more like a Shakespearean ‘much ado about nothing’. (300 words)

Explain how central bank controls the Monetary Policy

6-As a result of contractionary monetary policy, A.interest rates fall, the dollar depreciates, and domestic goods...

6-As a result of contractionary monetary policy, A.interest rates fall, the dollar depreciates, and domestic goods become cheaper, thereby reducing net exports. B.interest rates rise, the dollar appreciates, and domestic goods become cheaper, thereby increasing net exports. C.interest rates rise, the dollar appreciates, and domestic goods become more expensive, thereby reducing net exports. D.interest rates rise, the dollar appreciates, and domestic goods become cheaper, thereby reducing net exports. 15-As a result of an increase in the money supply, some banks...

4) What happens to the value of the dollar if the European Central Bank (ECB) tightens...

4) What happens to the value of the dollar if the European Central Bank (ECB) tightens its money supply and raises interest rates? How will this impact the value of the dollar, exports and imports, AD and GDP? 5) What are 5 financial innovations and deregulations that led to the financial crisis in 2008? What are 5 policy responses by the Federal Reserve and the U.S. Government and Treasury department that helped us to get out of the financial crisis?...

How do the monetary policy tools of the European System of Central Banks compare to the...

How do the monetary policy tools of the European System of Central Banks compare to the monetary policy tools of the Fed? Does the ECB have a discount lending facility? Does the ECB pay banks an interest rate on their deposits?

In which of the following situations would the Reserve Bank of Australia conduct contractionary monetary policy?...

In which of the following situations would the Reserve Bank of Australia conduct contractionary monetary policy? A.The RBA fears that unemployment is climbing above the natural rate of unemployment. B.The RBA is worried that deflation will become a problem. C.The RBA is concerned that the natural unemployment rate is trending downward. D.The RBA is concerned that the growth in aggregate demand would continue to exceed the growth in potential GDP. E.The RBA believes that aggregate demand is growing too slowly...

Question