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9) Conceptual questions in Chapter 6: a) What happen to USD when Federal Reserve Bank decreases interest rate? b) Who benefits and who loses when

9) Conceptual questions in Chapter 6:

a) What happen to USD when Federal Reserve Bank decreases interest rate?

b) Who benefits and who loses when USD depreciates and appreciates?

c) When Fed decreases interest rates, what will happen if real interest rate dominates expected inflation and other determinants of USD?

d) When Fed decreases interest rates, what will happen if expected inflation dominates real interest rate and other determinants of USD?

Understand which periods real interest rate or inflation has major impact on USD. The answers are identified in the graph.

image text in transcribed

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-0.1 -0.05 0.05 0.1 0.15 0.2 1964 1965 1966 1967 1968 1969 1070 1970 1971 1974 20 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 000 1983 1984 1985 1986 10 1987 1988 00 1989 1000 1990 4004 1991 1002 1992 1993 1993 00 1994 1995 1996 400 1997 1000 1998 1999 2000 2000 00 Interest rate, inflation and US$ return USD return Inflation B Real IR dominates -Real IR Both dominates 6-20 -0.1 -0.05 0.05 0.1 0.15 0.2 0 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1994 During crisis times Both USD return 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 none Inflation Real IR 2000 inflation 2001 2002 2008 2004 2005 2006 2007 tho 2009 2010 2011 2012 2013 2014 2015 2016 2017 6-21

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