Answer :
The real interest rate in Santa Clara:
When the Santa Clara Fed lowers the interest rate, it is likely to decrease the real interest rate in Santa Clara.
The real interest rate is the nominal interest rate adjusted for inflation. A decrease in the nominal interest rate, assuming inflation remains constant, would result in a lower real interest rate. This can incentivize borrowing and investment, stimulating economic activity. In the short run, a lower interest rate in Santa Clara may lead to a depreciation of the Santa Clara Peso relative to the US dollar. When the interest rate is lowered, it can reduce the return on investments denominated in the local currency, making them less attractive for foreign investors. This can lead to a decrease in demand for the Santa Clara Peso, causing its value to decline relative to the US dollar.
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Final answer:
When the Santa Clara Fed lowers interest rates, it influences the real interest rate, the nominal exchange rate, and the current account deficit. The drop in interest rates generally sparks economic activity but can lead to a depreciated Santa Clara Peso in the short run and could inflate the current account deficit.
Explanation:
When the Santa Clara Fed lowers the interest rate, the immediate effect would be a decrease in the real interest rate in Santa Clara. The decrease in interest rate typically stimulates more borrowing and investment, hence spurring economic activity. For the nominal exchange rate in the short run, the lower interest rate could lead to the depreciation of the Santa Clara Peso relative to the US Dollar as investors might shift investments to countries offering higher interest rates.
In the long run, it does depend on various factors like inflation trends and economic growth, but the value of Santa Clara Peso might stabilize if the economic policies are sound. Lastly, regarding the current account deficit, lower interest rates encourage domestic consumption, which may increase imports. This could lead to an increase in the current account deficit of Santa Clara if imports grow faster than exports.
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