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On June 19, 2013, following the FOMC’s regular policy meeting, the Chair of the FOMC made remarks during a press conference that were widely interpreted in financial markets to mean that the Fed might begin reducing the size of its $85 billion in monthly asset purchases sooner than expected.

a) What effect, if any, should this statement have had on interest rates and dollar exchange rates?

b) In the days following the press conference, the Fed worried that markets had overreacted, and several Fed officials, including the Chairman, strongly reiterated that reductions of asset purchases would begin only if economic conditions warranted, indicating that reductions in asset purchases might not happen sooner than expected. What effect, if any, should this statement have had on interest rates and dollar exchange rates?

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