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Q. Explain how the money markets of two countries are linked through the foreign exchange market.
Answer: The financial policy actions by the Fed affect the U.S. interest rate altering the dollar/euro exchange rate that clears the foreign exchange market. The European System of Central Banks (ESCB) is able to affect the exchange rate by changing the European money supply and interest rate.
Although the elegance and comprehensiveness of transactions costs reasoning has provided the internalisation approach with a powerful logic (Rugman, 1981, 1985), it is still defici
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