When the Fed lowers the federal funds rate, the U.S. dollar ________ on the foreign exchange market and ________.

Question

Quizplus · Accepted Answer

When the Federal Reserve lowers the federal funds rate, it makes borrowing cheaper, which tends to stimulate economic activity by encouraging spending and investment. This can lead to a depreciation of the U.S. dollar on the foreign exchange market, as lower interest rates make dollar-denominated assets less attractive to investors, reducing demand for the dollar. Additionally, a cheaper dollar makes U.S. goods more competitive abroad, potentially increasing exports and decreasing imports, which contributes to an increase in aggregate demand.

When the Fed Lowers the Federal Funds Rate, the U