Question

Until recently, the US Dollar had been appreciating. This was occurring as the growth rates of European and some Asian economies were slowing. Based on these two trends only, how would the rate of growth for the US economy change from its previous levels (provide your basis for this). What should the effect of these two factors be on interest rates, the S&P 500 index, and commodity prices (briefly provide your basis for each of these changes). DO NOT ASSUME ANY ACTIONS BY THE FEDERAL RESERVE IN FORMULATING YOUR ANSWER.

Answer 1

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Question:

Answer:

There's normally an inverse relationship between the value of the dollar and interest rate. When interest rate increase its increase foreign capital or investment inflow that increase demand for USD and USD get appreciated. Inflow increase due to higher rate of retun. Other side when domestic demand decrease its decrease price level and when price level decrease its increase the purchasing power of USD and USD get appreciated. It means a appreciated USD indicate a either decreasing domestic demand of increasing foreign capital inflow. USD is a international currency and base currency of most of the currency pairs. USD is the most stable and the strongest currency of the world. Now other factor is- this was occurring as the growth rates of European and some Asian economies were slowing. It means the income level in those economies decreased that decreased demand or say AD in those economies and it will decrease import in these countries because at the lower level of income consumers of thses countries will consume less and will spend less on imported products.

Now come on the question and see how apprecitng USD and slow economic growt rate will affect to the interest rates, the S&P 500 index, and commodity prices. Appreciating currency indicating the higher interest rate in the US economy that is indicators of a healthy economy or higher inflation and other side economic slow down will negatively affect to the global investors who are investing in these European and some Asian economies and they will park their money ouside of search new market and it will ncraese inflow of foreign currency in the US market and it will increase money supply in the US economy and interest rate will get down. Other side slow import down and appreciating USD will negatively affect the US export and US export will decrease that will negatively affect to the net export level in the US economy. Decreasing net export will decrease AD and decreasing AD will decrease price level and output level or economic growth. Other side capital inflow of forign capital will boost the stock market. If FIIs will invest in the US stock market then S & P index will rise. Most of the time the trend of the economic growth and indexes are inverse and this kind of situation could be occur. There's normally an inverse relationship between the value of the dollar and commodity prices.When it comes to international trade for raw materials, the dollar is the exchange mechanism in many if not most cases. So, appreciating USD will decraese price for commodities and it will be beneficial for the US.

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