If Real Interest Rates in the United States Fell, with the Dollar

question 11

Multiple Choice

If real interest rates in the United States fell, with the dollar initially trading for 9 French francs, which of the following scenarios might be observed?

• A) The value of the dollar might climb to 9.5 francs before falling back to 9.25 francs.
• B) The value of the dollar might fall immediately to 8.5 francs and then continue downward more slowly to a new equilibrium of 8.25 francs.
• C) The value of the dollar might fall to 8.5 francs before recovering partially to 8.82 francs.
• D) The value of the dollar might hold in the neighborhood of 9 francs while domestic prices adjusted over the long term.
• E) None of the above.

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Definitions:

M1

A category of the money supply that includes physical currency and coins, demand deposits, traveler’s checks, and other checkable deposits.

M2

A measure of the money supply that includes cash, checking deposits, and easily convertible near money.

M3

A measure of the money supply that includes M2 plus large time deposits, institutional money market funds, and short-term repurchase and other larger liquid assets.

Shareholders

Individuals or entities that own shares in a corporation, giving them certain rights such as voting on corporate matters and receiving dividends.