Effects of September 11. Why do you think the terrorist attack on the U.S. was expected to cause a decline in U.S. interest rates? Given the expectations for a potential decline in U.S. interest rates and stock prices, how were capital flows between the U.S. and other countries likely affected?
Ans: If you look at interest rates prior to 9-11 they were already trending down due to inflationary pressure. After 9-11 I think the rates continued to trend down due to a lack of confidence in the market people were scared and unwilling to spend so they FED lowered FED funds rate to spur investment. Capital flows may have been affected temporarily after the attacks, but I don't think there was lasting effects. If you look at the velocity of the M1 you can see that it decreased after 9-11 and the picked up again in in 2002.
ANSWER: The attack was expected to cause a weaker economy, which would result in lower U.S. interest rates. Given the lower interest rates, and the weak stock prices, the amount of funds invested by foreign investors in U.S. securities would be reduced.
International Financial Markets. Carrefour the French Supermarket chain has established retail outlets worldwide. These outlets are massive and contain products purchased locally as well as imports. As Carrefour generates earnings beyond what it needs abroad, it may remit those earnings back to France. Carrefour is likely to build additional outlets especially in China.
a. Explain how the Carrefour outlets in China would use the spot market in foreign exchange.
ANSWER: The Carrefour stores in China need other currencies to buy products from other countries, and must convert the Chinese currency (Yuan) into the other currencies in the spot market to purchase these products. They also could use the spot market to convert excess earnings denominated in Yuan into euros, which would be remitted to the French parent.
b. Explain how Carrefour might...
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