The following report appeared in the New York Times on August 7,1989 (Dollars Strength a Surprise).

But now the sentiment is that the economy is heading for a soft landing, with the economy slowing significantly and inflation subsiding, but without a recession.

This outlook is good for the dollar for two reasons. A soft landing is not as disruptive as a recession, so foreign investments that support the dollar are more likely to continue.

Also, a soft landing would not force the Fed to push interest rates sharply lower to stimulate growth. Falling interest rates can put downward pressure on the dollar because they make investments in dollar-denominated securities less attractive to foreigners, prompting the selling of dollars. In addition, the optimism sparked by the expectation of a soft landing can even offset some of the pressure on the dollar from lower interest rates.

a. Interpret the third paragraph of this report using the model of exchange rate determination developed in Chapter 13 of your text and summarized in Figure 13.4.

b. What addition factors not captured by the Chapter 13 model might help you explain the second paragraph?

c. Is there a threat of a hard landing for the US economy in the fall of 2003? Why and/or why not?

d. What consequences might follow from a hard landing in the fall of 2003?