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Please explain in question no. 120
Why option C is correct one. Elaborate.
As selling of treasury securities by fed cause interest rates to rise which ultimately leads to depreciation of dollar …..and hence increased exports.
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Hi Dimpy Patkar
Your Explaination is wrong , actually selling of treasury securities ( to decrease rate of inflation) by fed will increase the Interest rate and so their will be more inflow of foreign capital in the us economy which will lead to appreciation of US Dollar and so exports will fall as US goods have become costlier for outsiders.
Option A & B are correct as this technique will decrease the rate of inflation and will increase the Interest rate( which is true statement). The question says which option will be least likely result in (u have to find out the wrong statement) and option c will be the ans because the technique adopted by Fed will lead to appreciation of us dollar and exports will fall ( Explained in 1st Para ) and in option c its mentioned exports will increase which is a wrong statement.
Hope it Helps.
I completely agree but I have a confusion that “currency has a lower interest rate should be at a forward premium.”
Hence , if interest rates fall , currency will appreciate.
Whether I am thinking in right direction. Please guide.
Hi u r thinking on the wrong direction
You are basically talking about the covered Interest rate Parity which states that money market gap that is interest rate differential will be offset by the forex mkt. Currency which has a lower interest rate will trade at a forward premium such that
F/S = (1+ia) / (1+ib)
Its main purpose is to prevent covered Interest Arbitrage. We don’t know whether this will hold good in reality. It may hold good just for a milli seconds. This concept is basically Theoritical.
The Question is not based on Covered Interest Parity , It’s a general question, so u can’t think the way u were thinking.
Hope its Clear.
I got it.
Thanks a lot.