5 Consider a terrorist attack on a country such as the Paris

5. Consider a terrorist attack on a country, such as the Paris, France attack on November 13, 2015. In many cases, such an attack is expected to weaken economic conditions and reduce local interest rates. Predict how the weaker economic conditions would impact trade flows. All else equal, how would the change in trade flows impact the value of the national currency? All else equal, how would the lower local interest rate impact the value of the national currency?

Solution

Weaker economic conditions means lower gross domestic product or lower GDP gowth that is likely to decrease in both imports and exports related to that country that means oveall trade activity will reduce. As we know that weak economic conditions means decline in employment and income level in the country that means lower demand for poducts so that will led to decline in the demand for imports. On the other side, in case of these attacks,. the country becomes less investment friendly due to which overall production and business activity takes a bad hit that means lower production and which will lead to lower exports.

Weak economic conditions means less demand for the country\'s FX for both payment for exports from this country and also for the FII as well as FDI investment in the country that will lead to depreciation of the currency of the country.

Even lower interest rate means lower return on bond investments that will also decline value of national FX.