In what way are higher interest rates and a lower value of the dollar bad for the U.S. economy?

describes th Show more A Wall Street Journal article As Fear of Deficits Falls Some See a Larger Threat describes the following threat of a high U.S. budget deficit: [T]he investors who finance our deficits by buying Treasury bonds and bills especially the foreigners who buy a larger share of them than ever will question our ability to repay them and balk at lending moretriggering a big drop in the dollar and much higher interest rates. a. Why would a drop in foreign confidence in the U.S. ability to repay debt lead to a drop in the dollar and much higher interest rates? A decline in demand for U.S. bonds will raise their price and lower the interest rate which will result in even larger capital inflows into the United States driving down the value of the dollar. A decline in demand for U.S. bonds translates into a decline in demand for dollars to buy those bonds. This will lower the value of the dollar. The decline in demand for U.S. bonds will lower their price and raise the interest rate. A decline in demand for U.S. bonds translates into higher bond prices and higher interest rates. This results in even larger capital inflows into the United States driving down the value of the dollar.) A decline in demand for U.S. bonds translates into even larger capital inflows into the United States driving down the value of the dollar. The decline in demand for U.S. bonds will lower their price and raise the interest rate. b. In what way are higher interest rates and a lower value of the dollar bad for the U.S. economy? Higher interest rates increase the cost of borrowing resulting in reduced short-run aggregate expenditures and long-run crowding out of private investment. A lower value of the dollar makes imports more expensive hurting individuals as well as businesses that use imports as intermediate goods. Higher interest rates result in capital outflows away from the United States. A lower value of the dollar makes it more expensive for foreigners to buy U.S. exports. Higher interest rates result in inflationary pressure that can lead to higher expectations of inflation. A lower value of the dollar makes it harder for the U.S. government to internationalize its debt Higher interest rates result in a higher current account deficit. A lower value of the dollar makes it more expensive for foreigners to buy U.S. exports. Show less

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