Question from Past Macroeconomics Qualifying Exam (Spring, 2005 - Question two) at George Mason University[]
2. The continuing decline in the value of the dollar against the euro raises question marks concerning the continuing position of the US dollar as a reserve currency. Suppose that these fears come to pass, and that the dollar quickly falls in value to $2 to a euro, and beyond. In the absence of any macroeconomic policy response by the United States, what would be the short-run effect of such a collapse on (a) domestic output, (b) the US trade balance, (c) the domestic rate of price inflation; and (d) the unemployment rate? Be careful to specify the macroeconomic model that you deploy. In your view, should the US government take macroeconomic measures to avert such effects? If so, why? If not, why not?