Question

The US enters a deep recession, and Real GDP falls substantially. Even so, forecasters expect the...

The US enters a deep recession, and Real GDP falls substantially. Even so, forecasters expect the episode to be short-lived. Assume throughout that the Fed does not respond to these developments.

What are the consequences of this recession for the interest rate in the US and for the Dollars-per-Yen ($/¥) nominal exchange rate

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Answer #1

As the US is in recession, the interest rate in the US will fall, that is to increase the money supply and get more investment in the market. Due to lower investment in the market, capital will move to other nations where the interest rate is higher, this will lead to decrease in imports, increase in exports and depreciation in the market.

So, the interest rate will fall and Dollar per yen will increase.

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