Q. 9 Suppose the president of the Uni... [FREE SOLUTION]

Chapter 18: Q. 9 (page 495)

Suppose the president of the United States announces a new set of reforms that includes a new anti-inflation program. Assuming the announcement is believed by the public, what will happen to the exchange rate on the U.S. dollar.

Short Answer

Expert verified

The anti-inflation program to cut down the inflation rate will result in an appreciation of local money as because of higher loan costs, its interest would be higher prompting its appreciation.

Step by step solution

Concept Introduction

Inflation is a difficult concept to define in monetary terms. The term "anti-inflationary strategy" refers to methods for lowering inflation. Anti-inflationary policies or regulations aim to prevent or mitigate the effects of factors that generate inflation, such as excessively rapid wage increases.

Explanation

Delayed inflation reduces the value of money since more of it is expected to be spent on labor and goods than previously. With a higher measure of cash supply, inflation warms the economy.

To lower the rate of inflation. The national bank raises loan costs, reducing the cash supply in the economy due to an increase in the cost of obtaining cash.

Final Answer

The anti-inflation program, which aims to reduce inflation, will result in a rise in the value of local money, as greater lending costs mean higher interest rates, which will lead to a rise in the value of the currency.