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Suppose the Federal Reserve raises the federal funds rate in the United States but people believe that the inflation rate will rise by more than the Fed raised the federal funds rate.

/in /by

Suppose the Federal Reserve raises the federal funds rate in the United States but people

believe that the inflation rate will rise by more than the Fed raised the federal funds rate.

 

What do you expect to happen to the real interest rate and the exchange rate? Explain why.

As the exchange rate changes in the direction determined in part a, what happens to the prices of imports and exports in the United States and in other countries? Explain.

 
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