Assume we purchase goods from another country and they do not want to buy any products from us. The businesses in that country then have to make a decision to hold our cash or do what? hold our interest bearing assets B stop buying from America sell our cash to other countries they will just keep accumulating our cash 4. Question 6 the law of interest rate parity states 4 Points the foreign interest rate will increase if the percentage change in the nominal exchange rate is expected to decrease B over time, the interest rate in the home country will increase with the pace of inflation the difference in interest rates will be equal to the difference in inflation between the two countries the interest rate between the home country will equal the interest rate in the foreign country minus the expected percentage change in the nominal exchange rate Exports are a function of what two factors our GDP and our real exchange rate the foreign country's gdp and our real exchange rate our GDP and the other country's real exchange rate Dour trade deficit and the other countries capital account Question 8 4 Points Under a flexible exchange rate regime, the economy goes into a recession and it has a trade deficit. What is the one thing that we can do to correct the recession and the trade deficit at the same time? it can lower interest rates. The lower interest rates will increase business investment spending and household spending and lower the nominal exchange rate it can raise the interest rates. The higher interest rates will increase business investment spending and household spending and raise the nominal exchange rate it can lower interest rates. The lower interest rates will increase business investment spending and household spending and raise the nominal exchange rate it can raise the interest rates. The higher interest rates will increase business investment spending and household spending and lower the nominal exchange rate