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Chapter 6

Q. 6.ST.3

Briefly explain why the Federal Reserve may attempt to weaken the dollar.

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Verified Solution

A weaker dollar tends to increase the demand for U.S. goods because the price paid for a specified amount in dollars by non-U.S. firms is reduced. In addition, the U.S. demand for foreign goods is reduced because it takes more dollars to obtain a specified amount in foreign currency once the dollar weakens. Both forces tend to stimulate the U.S. economy and therefore improve productivity and reduce unemployment in the United States.