Question

You now understand the economies of the world use a free-floating exchange rate system. This system creates problems and benefits for anyone doing business outside their own borders.

- What problems or benefits do you think this relationship might cause for U.S. Importers and U.S. Exporters? Explain fully. Try to use a source to support your opinion. - What problems or benefits do you think this relationship might cause for U.S. economic policy makers as they try to manage the macroeconomy? Explain fully. Try to use a source to support your opinion.
- Explore the U.S. Debt Clock. Our political leaders are aware of these numbers, may talk about being concerned about them, but do not seem to engage in any meaningful actions to reduced either the rate they are growing or any of their magnitudes.
- How does exchange rate fluctuations impact the U.S. Debt and Deficit? Explain fully. Try to use a source to support your opinion.
- Do you believe the marginal benefit of our national borrowing is greater than the marginal cost of our national borrowing? Explain fully. Try to use a source to support your opinion.
- Provide a summary in your own words of the most important source that you referenced.
- Provide an active link (written as an APA citation) to the summarized source at the end of your response.
- Don't limit yourself to ideas from the module. Always strive to be detailed, specific, and clear in your writing. Assume your audience is a high school economics student.

Answer 1

Free-floating exchange rates impact U.S. exports and imports, influence policymakers' decisions in managing the economy, and affect U.S. debt and deficit costs.

Step-by-step explanation:

The free-floating exchange rate system can significantly impact U.S. importers and exporters. A stronger U.S. dollar makes U.S. goods more expensive overseas, thus potentially decreasing U.S. exports and benefiting foreign exporters selling in the U.S as their goods become relatively cheaper. Conversely, a weaker U.S. dollar may boost U.S. exports by making them cheaper abroad but make imports more expensive, which could hurt U.S. importers.

For U.S. economic policymakers, managing the macroeconomy under a free-floating exchange rate system can be challenging. The central bank must monitor the impact of exchange rates on aggregate demand, as changes can affect both imports and exports. Additionally, exchange rate fluctuations may cause difficulties for financial institutions, potentially leading to unsustainable international capital flows.

When it comes to the U.S. debt and deficit, exchange rate fluctuations can affect the cost of servicing foreign-held debt. A stronger dollar can reduce the local currency cost of paying off debt denominated in foreign currencies. However, this might also result in foreign investors seeking higher interests to offset exchange rate risks, which could enlarge the deficit. As for national borrowing, whether the marginal benefit exceeds the marginal cost depends on the use of borrowed funds and the economic context. Productive investments that yield high returns can justify borrowing despite the associated costs.