In 1995 House Speaker Newt Gingrich threatened to send the United States into default on its debt.During the day of this announcement,U.S.interest rates rose and the real exchange rate of the U.S.dollar depreciated.Which of these changes is consistent with the results of the open-economy macroeconomic model?
A)the increase in U.S.interest rates
B)the depreciation of the real exchange rate of the U.S.dollar
C)Both a and b are consistent.
D)Neither a nor b are consistent.

Question

Quizplus · Accepted Answer

According to the open-economy macroeconomic model, a threat to default on debt would lead to a decrease in the demand for U.S. assets and an increase in U.S. interest rates. This is consistent with the increase in U.S. interest rates observed during the day of the announcement. Additionally, the increase in U.S. interest rates would lead to a depreciation of the real exchange rate of the U.S. dollar. This is consistent with the observed depreciation of the U.S. dollar. Therefore, both a and b are consistent with the open-economy macroeconomic model.

In 1995 House Speaker Newt Gingrich Threatened to Send the United