Question

1) The United States economy is growing at a faster rate than its trading partner United Kingdom. As a result, the rate of American inflation is increasing.

1A) Show and explain how the increase in inflation will affect the international value of the United States dollar and the value of the British pound. (Make sure you graph each, using the concepts of supply and demand and the cost of domestic goods in your explanation.)

1B) Explain how the changing value of the dollar will affect the United States' exports and imports. (Make sure you use the concepts of the cost of foreign and domestic goods in your explanation.)

2) The Federal Reserve decreases the money supply in the United States causing interest rates to increase.

2A) Explain how the change in interest rates will affect United States aggregate demand. (Make sure to include the determinant that causes the change in aggregate demand in your explanation.)

2B) Draw a correctly labeled graph of the foreign exchange market for the British pound, showing the effect of the increasing interest rate identified in the scenario on the value of the British pound relative to the U.S. dollar. (Make sure you use the concepts of supply and demand and financial capital in your explanation.)

Answer 1