Economics 4002.01
Discussion Board Assignment 6

Chapter 6 introduces the rest of the world into our picture by considering the open economy. The United States can be considered a large open economy. The book gives you some examples of how a large open economy responds to things like government policies. For this week, I would like you to select a policy proposed by one of the presidential candidates and consider how it might affect the real rate of interest, net exports, and the real exchange rate. If you would prefer, you could choose to do the same analysis for the Federal Reserve’s stated policy.

Begin by clearly stating which candidate you are considering and which of their policies you will be discussing. (If it is the Fed you are considering then also make that clear.) Then describe the policy providing all relevant details. Finally, explain what you believe the effects of that policy will be on the real rate of interest, net exports, and the real exchange value of the dollar.

It might be a good idea to read other posts before you make you own post. Try to bring a new idea that has not already been addressed by others. Also be sure to respond to at least two other posts.

Reply 1
I will be examining the Fed’s most recent Decisions Regarding Monetary Policy Implementation (linked below). In summary, the Fed released this statement letting the public know how they are going to address the dual mandate via monetary policy following the covid-19 global pandemic. The Fed is working to maintain inflation rates at an average of 2%. Additionally, they have worked to maintain the federal funds rate of 0-1/4%. The decisions made by the Fed in its most recent meeting are as follows: interest rates on excess reserve are at .1%; maintain federal funds rate of 0-1.4%; primary credit rate will exist at .25%. The question posed in this weeks’ Discussion Post asks how the real rate of interest, net exports, and real exchange value of the dollar change as a result of these policies. The real rate of interest will decrease. As interest rates are low, not taking into account inflation (as real interest rate does not), interest rates will remain at an all-time low. Net exports will also increase as a result of inflation and low interest rates. This will decrease the value of the dollar over time, thus making United States goods much cheaper compared to domestic goods. The real exchange value of the dollar will decrease significantly and are not currently strong against the currency of other countries. The actions taken by the Fed are completely unprecedented in the history of our economy. I have linked the WSJ article that talks about these unprecedented measures and inflationary goals.
Fed Actions: https://www.federalreserve.gov/monetarypolicy/files/monetary20200916a1.pdf (Links to an external site.)
WSJ Article: https://www.wsj.com/articles/feds-powell-headlines-virtual-jackson-hole-economic-conference-11598486400

Reply 2
Presidential candidate Joe Biden would make universal health care available to eligible Americans who want it. Biden’s plans would likely require tax increases for corporations and individuals, especially those with the highest incomes. An increase in taxes would most likely increase national saving and lead to a trade surplus. The increase in saving decreases the real rate of interest. Because net exports are negatively related to the real exchange rate, a trade surplus would result in a decrease of the real exchange rate. A trade surplus typically helps to strengthen a country’s currency relative to other currencies.