Question

A decrease in U.S. interest rates leads to: a. a depreciation of the dollar that leads to greater net exports. b. a depreciation of the dollar that leads to smaller net exports. c. an appreciation of the dollar that leads to greater net exports. d. an appreciation of the dollar that leads to smaller net exports.

Answer 1

Answer:

a depreciation of the dollar that leads to greater net exports.

Explanation:

The interest rate is considered "the price of money". When the interest rate is high, more dollar is demanded and appreciated, as economic agents can make a greater profit from buying US bonds (which pay interest-rate). Thus, the dollar becomes more expensive. compared to other currencies. Conversely, when the interest rate decreases, the dollar tends to depreciate against other currencies.

Exports, in turn, are associated with the value between currencies. When the dollar depreciates, it means that more dollars can be bought with the same amount of foreign currency. In terms of trade, this stimulates exports, as dollar depreciation makes American products cheaper for other countries. Consequently, the competitiveness of the American economy increases as a whole.

For example, imagine a foreign company that buys US smartphones. If the rate is 1: 1, ie 1 foreign currency unit buys 1 dollar. Now imagine the Federal Reserve lowering the interest rate by depreciating the dollar so that the new exchange rate is 1: 1.20, ie 1 foreign currency buys $ 1.20. For the foreign company it was cheaper to buy American smartphones, as the dollar depreciated against its currency. In contrast, for the US to buy (import) goods from another country is more expensive. Since the net trade balance is the difference between exports and imports, the economy tends to have a higher net export balance.