Question

Suppose interest rates fall in the United States, but they don't fall in other nations. What is the impact on the flow of financial capital, the value of the U.S. dollar, and U.S. net exports (based on the changing value of the dollar)? Capital Flow / Value of the U.S. dollar / Net Exports (3 points)

Answer 1

Outflow of financial capital : Depreciating value of the U.S. dollar : Increased net exports

Explanation:

There will be an immediate outflow of financial capital due to the fall in the interest rates as it will be no more profitable in relation to other nations. Due to the capital outflow, the US currency demand will fall and results to the decrease in the exchange rate (price) or it can be said that the exchange rate depreciates.  

This depicts that, the US exports will be cheaper as the US dollar price or exchange rate decreases. In other words, it can be stated that the value of the other nations’ currencies will increase as compared to the US currency.

This will make it easier to purchase the same baskets for reduced bill amount and thus the exports may get increased.