Some key things about policies, interest rates and exchange rates to remember:

1. Factors that shift the demand for a currency (such as the demand for that country's goods, services, or assets) and the supply of a currency (such as tariffs or quotas on the other country's goods and services) change the equilibrium exchange rate.

2. Fiscal policy can influence aggregate demand, real output, the price level, and exchange rates.

3. Monetary policy can influence aggregate demand, real output, the price level, and interest rates, and thereby affect exchange rates.

4. Factors that cause a currency to appreciate cause that country's exports to decrease and its imports to increase. As a result, net exports will decrease.

5. Factors that cause a currency to depreciate cause that country's exports to increase and its imports to decrease. As a result, net exports will increase.

6. In an open economy, differences in real interest rates across countries change the relative values of domestic and foreign assets. Financial capital will flow toward the country with the relatively higher interest rate.

7. Central banks can influence the domestic interest rate in the short run, which in turn will affect net capital inflows.

1. Madagascar's fiscal policies lead to an increase in Madagascar's real GDP - when answering the question, think about what more output does to income and spending. Assume that they are trading with the U.S.

A. Graph the currency changes using two separate graphs.

B. Does the U.S. dollar appreciate or depreciate?

C. Does the Malagasy ariary appreciate or depreciate?

D. As a result of the changing value of the U.S. dollar answer each of the following:

i. U.S. exports (increase/decrease). Explain why.

ii. U.S. imports (increase/decrease). Explain why.

iii. U.S. AD shifts (left/right)

iv. Price levels in the U.S. (rise/fall)

2. The United States' federal budget deficit increases which causes the United States interest rates to rise. Assume that we are analyzing trade between the United States and Fiji.

A. Graph the currency changes using two separate graphs.

B. Does the U.S. dollar appreciate or depreciate?

C. Does the Fijian dollar appreciate or depreciate?

D. As a result of the changing value of the U.S. dollar answer each of the following:

i. U.S. exports (increase/decrease). Explain why.

ii. U.S. imports (increase/decrease). Explain why.

iii. U.S. AD shifts (right/left)

iv. Price levels in the U.S. (rise/fall)

3. Egypt's interest rates are increasing, while the United States interest rates remain relatively constant. Answer the questions below from the information above.

A. Graph the currency changes using two separate graphs.

B. Does the U.S. dollar appreciate or depreciate?

C. Does the Egyptian pound appreciate or depreciate?

D. As a result of the changing value of the US dollar, answer each of the following:

i. U.S. exports (increase/decrease). Explain why.

ii. U.S. imports (increase/decrease). Explain why.

iii. U.S. AD shifts (right/left)

iv. Price levels in the U.S. (rise/fall)

4. There is a rapid increase in the price level in Yemen, while the United States' price level remains relatively constant.

A. Graph the currency changes using two separate graphs.

B. Does the U.S. dollar appreciate or depreciate?

C. Does the Yemeni rial appreciate or depreciate?

D. As a result of the changing value of the U.S. dollar answer each of the following:

i. U.S. exports (increase/decrease). Explain why.

ii. U.S. imports (increase/decrease). Explain why.

iii. U.S. AD shifts (right/left)

iv. Price levels in the US (rise/fall)