Q. 11 If nominal interest rates in Ame... [FREE SOLUTION]

Chapter 18: Q. 11 (page 495)

If nominal interest rates in America rise but real interest rates fall, predict what will happen to the U.S. dollar exchange rate

Short Answer

Expert verified

At any conversion standard, the normal profit from dollar resources diminishes, shifting the interest curve to one side and causing a drop in the conversion standard.

Step by step solution

Concept Introduction

Inflation is defined as a significant increase in costs or a decrease in the value of money. It is frequently the result of a great deal of interest being focused on a few products or limited services, resulting in increased prices.

Explanation

Because of the large expansion, when real loan costs fall, the currency exchange rate reduces as well. When the economy grows, currency value diminishes the increase in costs, causing the dollar exchange rate to fall. When the borrower repays the advance with revenue, the genuine financing cost estimates the rate of increase in purchasing power that the bank receives. It will increase the dollar exchange rate since speculation in that auto company will rise, stocks will rise, and the vehicle's commodities will rise.

Final Answer.

The value of the US dollar will fall. An increase in nominal interest rates but a fall in the real interest rate implies an increase in predicted growth, resulting in a typical depreciation of the dollar that is more than the increase in the domestic loan cost. As a result, at any conversion scale, the normal profit from dollar resources declines, causing the interest curve to shift to one side and the exchange rate to fall.