| Question | After the reunification of Germany in 1990, payments to rebuild the East led to a major expansion of aggregate demand in Gennany. The Gennan central bank responded by slowing money growth and raising German real interest rates. Trace through why this German monetary tightening would be expected to lead to a depreciation of the dollar. Explain why such a depreciation would stimulate economic activity in the United States. Also explain why European countries that had pegged their currencies to the German mark would find themselves plunged into recessions as German interest rates rose and pulled other European rates up with them. |
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| Subject | business economics |
