Topic 10 - Open economy 2

Question 1

what is the effect of an increase in the domestic interest rate on the exchange rate

Answer 1

increase in the exchange rate

Question 2

what is the effect of an increase in the foreign interest rate on the exchange rate

Answer 2

decrease in the exchange rate

Question 3

what is the effect of an increase in the expected future exchange rate on the current exchange rate

Answer 3

an increase in the current exchange rate

Question 4

what is the effect of an increase in interest rates

Question 5

what are the two channels through which lowering interest rates works

Answer 5

Lower interest rates increase investment.

Lower interest rates depreciate the exchange rate and boosts net exports.

Question 6

for a fixed exchange rate what is a loss of value of the domestic currency

Answer 6

devaluation

Question 7

for a fixed exchange rate what is a increase in value of domestic currency

Answer 7

revaluation

Question 8

what is the assumed effect of the Brexit vote on the value of the pound

Answer 8

would be lower as less trade with Europe means there is less demand for the pound

Question 9

what is the effect of the lower value of the pound on the interest parity condition

Answer 9

exchange rate depreciates so IP shifts to the left