The domestic economy seems to be overheating, with rapid economic growth and low unemployment. News has just been released that the monthly activity level is even higher than expected (as measured by new orders to factories and unemployment figures). This news leads to renewed fears of inflationary pressures and likely action by the monetary authorities to raise interest rates to slow the economy down.
a. Based on the traditional flow market approach, discuss whether this news is good or bad for the exchange rate.
b. Based on the asset market approach, discuss whether this news is good or bad for the exchange rate.