A war suddenly breaks out abroad causing foreign investors to seek safe haven for their investments in the U.S. As a result, foreign capital rushes in to buy U.S. assets - U.S. stocks, bonds, real estates, factories and businesses. Illustrate the effect of this massive capital inflow to the U.S. dollar exchange rate using a supply and demand model. Label all curves and axes properly for full credit. Does this cause the U.S. dollar to depreciate or appreciate? b) Assume the U.S. exports finished products heavily to the world and imports raw materials heavily from the world. How will the change in the U.S. dollar exchange rate resulting from events in a) affect the U.S. real GDP and price level? Show the changes using an AD/AS model, ignoring the LRAS curve. Clearly justify in words the shift of each curve that shifts. Mark the initial equlibrium as A and the new equilibrium resulting from the the exchange rate change as B. What happens to the U.S. real GDP and the U.S. price level as a result?
a) A war suddenly breaks out abroad causing foreign investors to seek safe haven for their investments in the U.S. As a result, foreign capital rushes in to buy U.S. assets - U.S. stocks, bonds, real estates, factories and businesses. Illustrate the effect of this massive capital inflow to the U.S. dollar exchange rate using a
b) Assume the U.S. exports finished products heavily to the world and imports raw materials heavily from the world. How will the change in the U.S. dollar exchange rate resulting from events in a) affect the U.S. real
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