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NATIONAL INCOME EFFECTS Analysts commonly attribute the appreciation of a currency to expectations that economic conditions will strengthen. Yet, this chapter suggests that when other factors are held constant, increased national income could increase imports and cause the local currency to weaken. In reality, other factors are not constant. What other factor is likely to be affected by increased economic growth and could place upward pressure on the value of the local currency?

FACTORS AFFECTING EXCHANGE RATES If Asian countries experience a decline in economic growth (and experience a decline in inflation and interest rates as a result), how will their currency values (relative to the U.S. dollar) be affected?

IMPACT OF CRISES Why do you think most crises in countries cause the local currency to weaken abruptly? Is it because of trade flows or capital flows?

ECONOMIC IMPACT ON CAPITAL FLOWS How do you think weaker U.S. economic conditions could affect capital flows? If capital flows are affected, how would this influence the value of the dollar (holding other factors constant)?