ECO372 ECO372 ECO 372 Week 4 DQ’s (use as a guide only)

Feb 3rd, 2012
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ECO 372 - Week 4 DQ’s • Due: Thursday, January 5th. • Min. 100 words per question Discussion Questions: 1. How do changes in interest rates, inflation, productivity, and income affect exchange rates? Is a strong U.S. dollar effective for worldwide economies? Why or why not? 2. Who benefits from a tariff or quota? Who loses? What are the positives and negatives of protectionist trade policies on the federal government’s part? Which policy is best right now? 3. What is the effect of a trade surplus? What is the effect of a trade deficit? How do trade deficits and surpluses affect the industry in which you work? 4. What is the importance of trade agreements? How is international trade related to the U.S. standard of living as opposed to a small industrial nation or a developing nation? How might trade agreements have a positive or negative effect on your industry?

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Q. How do changes in interest rates, inflation, productivity, and income affect exchange rates? Is a strong U.S. dollar effective for worldwide economies? Why or why not?Currency Exchange Rate And Its DeterminantsCurrency exchange rates are determined everyday in large global currency exchange markets and There is no fixed value for any of the major currency. All currency values are described in relation to another currency. The relationship between income, productivity, inflation, interest rates, and other domestic monetary policies, and currency exchange rates is complex, but at the core it is all about supply and demand.The interest rate influencesBy manipulating interest rates,central banksexert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values. The interest rate influences the exchange rate because it influences the demand and supply of currencies on the foreign exchange markets.Interest rates influence the return or yield on bonds. Because, for example, U.S. Treasury bonds can only be bought in U.S. Dollar, a high interest rate in the U.S. will create demand for dollars in which to purchase those bonds. A low interest rate, relative to other major economies, will reduce demand for dollars, as investors move toward higher yielding investments.Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and

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