Reference no: EM131523698

So far we have discussed the macroeconomic issues (GDP growth, inflation, unemployment, money supply, money demand, fiscal policies, and monetary policies) without much consideration to the rest of the world. However, the reality is that, we don't live in an isolated economy. The globalization process (the integration of economic activities and the ease of movements of funds, people, and commodities between nations) has limited governments control over local economies, and has complicated the outcome of macroeconomic policies.

When the local economy is doing well (high GDP growth, stable inflation, higher employment, and stronger currency), then it might attract foreign investors who wish to invest in physical capital (factories for example) or financial assets (stocks, bonds, money market, etc.). The flow of fund from foreign investors will have a positive (increase) effect on money supply, but negative effect on interest rates. In addition, foreign investors will need to purchase (exchange) the currency of the country they wish to invest in using their local currency. This means an increase in demand for that country's currency. This increase in demand causes the value of that currency to rise. This rise in the value of the currency in the global exchange market will cause an increase in the prices of exportable goods/services relative to other countries. In other words, when the country's economy is attractive to foreign investors, this could lead to higher price level in that economy for foreigners who wish to buy goods/services from that country.

Do you prefer a strong dollar or a weak dollar given the state of the economy today? What would a higher dollar value (exchange rate) mean to local producers?

Is it possible to have a strong dollar (relative to other currencies around the world), higher GDP growth, higher net exports, and higher rate of foreign investment in our local economy? Justify your answer.