Governments often complain about one another's macroeconomic policies. This question asks you to analyze one example.
a) During the late-1980s depreciation of the dollar, the United States pressured Germany to lower its interest rate. Explain why the United States might have wanted the German interest rate to be lower (that is, what would the likely effects on the U.S. economy be?). Be sure to include an appropriate graph with your explanation.
b) Germany some times responded to U.S. pressure by telling the United States to raise its own interest rate. Might the United States have achieved the same result from raising its own interest rate that it hoped to achieve from Germany lowering its? Compare the effects of the two policies, based on the models developed so far in the text. Why might the United States have preferred one policy over another?