Answer to Question #99837 in Macroeconomics for Tiffany

Question

3. For a number of years, the U.S. dollar was losing value relative to other currencies around the world.
a. Explain what sort of monetary policy would help to increase the value of the dollar and why it would have this effect. What effects does this policy have on unemployment and the merchandise trade balance?
b. Describe a fiscal policy that would help increase the value of the dollar and why it would have this effect. What effects does this policy have on unemployment and the merchandise trade balance?

Answer 1

3.a. The contractionary monetary policy. This tool of central bank will lead to high interest rates which then attracts foreign investment thereby increasing the demand for and value of the US dollar. This policy increases the unemployment rate while merchandise trade balance decreases.

3.b. Increase in government spending. An increase in government spending puts pressure on the US dollar to appreciate. This policy reduces the rates of unemployment and increases the merchandise trade balance.