Problem

1. If short-term capital is neither perfectly immobile nor perfectly mobile internationally, why is the predicted impact of expansionary fiscal policy on the exchange rate ambiguous?

2. Explain, using the IS/LM/BP model, how a rise in the expected appreciation of the foreign currency can lead to an increase in domestic interest rates.

3. Why might it be argued that recent changes in international prices of food and energy have had a smaller impact on the U.S. economy than would have been the case under the pre1973 pegged-rate system?

4. "A sudden increase in interest rates in the European Union would likely lead to both depreciation of the U.S. dollar and upward pressure on U.S. interest rates." Agree? Disagree? Why?