Problem: Suppose that the Fed perceives inflation on the horizon and decides to pursue a contractionary monetary policy. Explain the effects of this policy on the exchange rate of the dollar. Be specific. What effect will this policy have on U.S. firms that export to foreign countries? Explain. What effect will this policy have on American consumers' purchases of foreign goods? Explain. Explain how this policy will change (1) the U.S. balance of trade, and (2) the rate of foreign investment in U.S. assets.