hw3ansm11 - Homework 3: Solutions Principles of...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Homework 3: Solutions Principles of Macroeconomics: ECO 212 Question 1. A decrease in interest rates makes savings less attractive, so consumption rises. A decrease in interest rates makes it more expensive to buy houses and start new businesses on credit. So investment spending falls. A decrease in interest rates means US assets are less attractive than foreign assets, since US assets pay less interest. Thus, there is less demand for US assets by foreigners, and therefore less demand for US dollars by foreigners to purchase US assets. The fall in demand for dollars causes a decrease in the price (value) of the dollar, which is the nominal exchange rate. A fall in the nominal exchange rate means the less valuable US dollar buys less foreign goods, making imports more expensive. Similarly, foreigners can buy more dollars and therefore more US goods. Thus exports rise, imports fall, and net exports rise. Net exports therefore rise. The increase in consumption, investment, and net export spending generates income for store owners and workers. Thus income rises. Thus: a. Consumption rises. b. Investment spending rises.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/08/2012 for the course ECO 212 taught by Professor Lorca,m during the Summer '08 term at University of Miami.

Page1 / 4

hw3ansm11 - Homework 3: Solutions Principles of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online