In October 2008, central banks around the world coordinated a decrease in interest rates. Ben Bernanke, then Chairman of the Federal Reserve, stated that "policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant." If all the banks enacted the policy simultaneously, the U.S. interest rate differential would ________ and so the U.S. exchange rate would ________.
A) increase; fall
B) decrease; rise
C) not change; not change
D) not change; rise

Question

Quizplus · Accepted Answer

DIf all central banks around the world coordinated a decrease in interest rates simultaneously, the interest rate differential between the U.S. and other countries would not change because all are adjusting their rates by similar magnitudes. Therefore, the relative attractiveness of U.S. assets compared to foreign assets remains the same, theoretically leaving the exchange rate unchanged. However, in practice, global perceptions, speculative movements, and other factors could lead to changes in the exchange rate despite the unchanged differential. The statement does not provide enough information to definitively predict the direction of the exchange rate change, making both C and D potentially correct based on the given information.

In October 2008, Central Banks Around the World Coordinated a Decrease