Question

In the foreign exchange market, how does a change in expected future U.S. exchange rate affect the demand for dollars?

If the Fed wants to close a recessionary gap, should it buy or sell government securities? Explain why?

"As the economy moves upward along its aggregate supply curve, the economy also moves upward along its short-run Phillips curve." Is the previous statement correct or incorrect? Briefly explain your answer.

Answer 1

1.

When there is an expectation of appreciation in the exchange rate of US dollar, then people and other entities, will convert their other currencies into the US dollar. It will lead to the increase in demand of the US dollar. As a result, the US dollar will appreciate. Though, with expectation of depreciation of  exchange rate of US dollar, people will start selling US dollars in anticipation to save themselves from decrease in value. It will decrease the demand and increase the supply of US dollar. It will make US dollar to depreciate in exchange with other major currencies.

2.

Fed will opt for the expansionary monetary policy to close the recessionary gap. To do this, Fed will buy the government securities so that funds are injected to the economy. It increases the money supply that will be used for consumption and investment spending. As a result, economy will achieve the potential output level and recessionary gap will be eliminated.

3.

It is a correct statement.

When economy moves upward among the SR AS curve, then it means that price level in the economy is increasing and inflation rate increases as well in the economy, along with the rise in aggregate output and new jobs creation. At the same time, when there is an upward movement along the SR Philips curve, then it means to rise in price level or inflation rate with decrease in unemployment. So, changes in both the curves, take place as mentioned in the statement.