In a later chapter, you will learn that a drop in the interest rate has another channel of influence on real GDP: It causes a depreciation of the dollar (that is, it makes the dollar cheaper in terms of foreign currency), which, in turn, increases U.S. net exports.
a. When we take account of the effect on net exports, does a given change in the money supply have more or less impact on real GDP?
b. Suppose that the Fed wants to stimulate the economy using conventional tools, as it did during late 2007 and early 2008. Should the Fed lower the interest rate by more or by less when it takes the impact on net exports into account ( compared to the case of no impact on net exports)? Explain.