The following report appeared in the New York Times on August 7, 1989: "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 the foreign investments that support the dollar are more likely to continue. Also, a soft landing would not force the Federal Reserve to push interest rates sharply lower to stimulate growth. Falling interest rates can put downward pressure on the dollar because they make investment 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." Using the graph on the right, show how lower interest rates can put downward pressure on the dollar. 1) Using the line drawing tool, show how lower interest rates can put downward pressure on the dollar. Properly label this line. 2) Using the point drawing tool, show the new equilibrium. Label the new equilibrium "B". Carefully follow the instructions above and only draw the required objects. Exchange rate E($/Euro) w Foreign Exchange Market R$ A Expected Euro Return Rates of Return (in dollar terms)
The following report appeared in the New York Times on August 7, 1989: "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 the foreign investments that support the dollar are more likely to continue. Also, a soft landing would not force the Federal Reserve to push interest rates sharply lower to stimulate growth. Falling interest rates can put downward pressure on the dollar because they make investment 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." Using the graph on the right, show how lower interest rates can put downward pressure on the dollar. 1) Using the line drawing tool, show how lower interest rates can put downward pressure on the dollar. Properly label this line. 2) Using the point drawing tool, show the new equilibrium. Label the new equilibrium "B". Carefully follow the instructions above and only draw the required objects. Exchange rate E($/Euro) w Foreign Exchange Market R$ A Expected Euro Return Rates of Return (in dollar terms)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Aa6
Transcribed Image Text:The following report appeared in the New York Times on August 7, 1989:
"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 the foreign investments that support the dollar are
more likely to continue.
Also, a soft landing would not force the Federal Reserve to push interest rates
sharply lower to stimulate growth. Falling interest rates can put downward
pressure on the dollar because they make investment 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."
Using the graph on the right, show how lower interest rates can put downward
pressure on the dollar.
1) Using the line drawing tool, show how lower interest rates can put downward
pressure on the dollar. Properly label this line.
2) Using the point drawing tool, show the new equilibrium. Label the new
equilibrium "B".
Carefully follow the instructions above and only draw the required objects.
Exchange rate E($/Euro)
Foreign Exchange Market
1
R$
Expected Euro Return
Rates of Return (in dollar terms)
√
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