Question

To understand the Fiscal Policy Dilemma, you may want to first examine how changes in interest rates, inflation, productivity, and income would affect exchange rates. Then, in this perspective as exchange rates affect Fiscal Policy in an open economy, is a strong U.S. dollar always good for the U.S. and global economies? Why or why not?

Answer 1

ANSWER:

The real goal of American policymakers isn’t a strong dollar currency overall. The policy is keeping a strong dollar at home and a weak one abroad. A strong home currency can keep inflation in the home country low, since it encourages consumers to buy abroad, thus an average American can keep up their standard of living without feeling squeezed. A weak dollar is expected to favorably affect U.S. exporting firms and adversely affect U.S. importing firms. For increasing the business of sending the goods and services abroad, , a weak international dollar is actually the better way to go, since it makes American exports cheaper for foreign buyers. Moreover, will also enable cheap imports from countries like China. It will be a good deal as U.S. households are mired in debt and need to raise their savings. Thus, weak dollar benefit U.S exports by making American goods cheaper in foreign country. However, it's a self-correcting mechanism in the foreign exchange market. A stronger dollar eventually leads to a weaker dollar internationally, while a weaker dollar eventually leads to a stronger one through the implications of growth.