When the Fed raises the federal funds rate, the exchange rate ________ and net exports ________.

Question

Quizplus · Accepted Answer

When the Fed raises the federal funds rate, it becomes more attractive for investors to hold US dollars, which increases the demand for US dollars and therefore the value of the US dollar relative to other currencies. This means that the exchange rate increases. As a result, net exports decrease as US goods and services become relatively more expensive for foreign buyers, which reduces demand for US exports.

When the Fed Raises the Federal Funds Rate, the Exchange