Exam 21: Macro Policy in a Global Setting

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If the U.S.can convince the Japanese to conduct an expansionary monetary policy,this will result in a decrease in the exchange rate values of the yen,which,from the perspective of the U.S.,means an increase in the exchange rate value of the dollar versus the yen.This is exactly what the U.S.wants to achieve.

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Internationalizing the debt occurs when foreigners buy the domestic debt at an existing interest rate.This foreign demand for domestic debt helps to keep domestic interest rates low.Crowding out occurs when financing the deficit by selling debt drives up the interest rate.However,this will not occur if foreigners buy up the debt at existing interest rates (internationalizing the debt).This avoids the immediate problem of increased interest rates,but it is not costless.Foreign ownership of debt means that the U.S.must make interest payments each year.To cover these payments,the U.S.must produce more than it consumes in the future.

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The U.S.exchange rate fluctuated significantly over the past 30 years.The dollar appreciated during the early 1980s,faced sharp depreciation during late 1980s,and then appreciated again during the 1990s.The U.S.trade balance,however,has had a deficit nearly every year since 1970.These trade deficits became much larger after 2000.