Question: Economic events in other countries, such as the financial crises in Eastern Europe and Asia during the 1990s have apparently force the Federal Reserve to take a more global view. This is particularly relevant in how it sets interest rate policies in the United States. When the economies of Asia suffered severe economic crises, the value of their domestic currencies fell in international markets. This allowed U.S. companies to buy commodities from these countries at much lower prices in terms of U.S. dollars. Apparently, these falling commodity prices helped reduce any threat of inflation in the United States during this period. Some observers argue that is why we saw robust economic growth without inflation, as well as a surging stock market. Policymakers at the Federal Reserve realized that they could continue to increase the money supply at a historically fast pace without immediate fear of inflation.

At the start of the Asian financial crisis, the U.S. stock market began to falter. The Federal Reserve immediately announced several interest rate cuts. Federal policymakers later stated that they wanted to cut rates to avert a credit crunch that could have triggered a global recession. Clearly, the Federal Reserve is taking international developments into account more than ever before when deciding what policy to make for the United States. In what ways can global events affect the U.S. economy? Please explain and discuss. [20 points]

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