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Elucidate Impact of loss of global investors confidence on exchange rate and nominal interest rate.
The following quotations are from an article in the Financial Times on November 9, 2007:
1. The spectacle of US banks struggling to figure out how much they have lost on credit products has shaken confidence in US markets.
2. The large current account deficit complicates the Fed's efforts to deal aggressively with risks to growth, because a deficit economy is always potentially vulnerable to a loss of global investor confidence."
a. First, with the help of a graph of the foreign exchange market-where e represents the dollar price of a unit of foreign currency-explain how a loss of global investor confidence in the U.S. will affect the exchange rate, in the case of flexible exchange rates
b. And second, with the help of the appropriate equation, explain what will be the effect of a loss in investor confidence on the nominal interest rate in the U.S.