6. (5.5) Consider the following sequence of comments and events (Mnuchin is the USA Treasury Secretary, Trump is the USA president, and Powell is the current chair of the Federal Reserve). If you want to use numbers, suppose that the current exchange rate is $2=1:

Mnuchin's comments: https://www.cnbc.com/2018/01/24/a-weaker-dollar-is-good-for-the-us-treasury-secretary-mnuchin-says.html

Trump's comments on Mnuchin's comments: https://www.cnbc.com/2018/01/25/trump-says-dollar-to-get-stronger-and-stronger.html

Powell: https://br.reuters.com/article/global-forex/forex-dollar-rises-to-one-year-high-as-fed-comments-boost-outlook-idUSL8N1UF3HV

a. (1) Consider Mnuchin's comments: Would a weaker dollar encourage additional financial investment in the United States? Explain.

b. (0.5) Consider Mnuchin's comments: Did the movement of exchange rates after his statement adhere to his goal of a weaker USA dollar? Explain.

After Mnuchin's comments, the dollar index dropped, indicating that the movement of exchange rates after his statement did adhere to his goal of a weaker dollar. This makes sense when we return to the concept of economic self-fulfilling prophecies, discussed in Question 1.

c. (2) Consider Trump's comments on Mnuchin's comments. Is it possible to reconcile his statement with Mnuchin's statement? If yes, explain. If no, explain why not. [Both answers could receive full points].

c) Trump's comments on the dollar appear to directly contradict Mnuchin's because Trump is hoping for a strong dollar, while Mnuchin is hoping for a weak dollar. From Trump's perspective, he wants to assure Americans that the US economy is continuing to grow stronger, and it is easier to convince people of this when the dollar is increasing in value. For most people, it is easy to see that when the dollar is worth more, the same number of dollars is worth more foreign currency. Moreover, currency appreciation is associated with higher interest rates, which means that foreign investors are incentivized to invest more in the US. As a result, US consumers benefit from greater purchasing power worldwide, and the US economy will benefit from greater investment.

On the other hand, Mnuchin's comments are not as directly understandable to most people, mainly because of the negative connotation "weaker" has. However, when the dollar is weaker, American goods become relatively cheaper to foreign consumers. Therefore, the US economy still benefits from greater spending due to increased foreign demand for US goods.

Though there are benefits to having a stronger or weaker dollar, in this case, the benefits Trump is alluding to are separate from those of Mnuchin. So, it is difficult to reconcile Trump's statement with Mnuchin's by saying they are both referring to the same benefits, since each of them are talking about the benefits of opposite trends in the exchange rate.

d. (2) Consider the article with Powell, which occurred several months later.

1. (0.5) The article mentions increasing [interest] rate differentials. In which direction must USA interest rates be changing relative to the rest of the world to be consistent with the behavior in the article (increase or decrease). Briefly explain or show in a diagram.

1. (0.5) The article implies that tariffs on China has caused the Chinese yuan to weaken in foreign exchange markets. Explain why.

1. (0.5) Would a weaker yuan make Trump's occasional goal of decreasing Chinese imports easier or more difficult?

1. (0.5) Would a weaker yuan imply a weaker or strong dollar? [Easy question]