Why would lowering its own interest rates affect a nation's exchange rate?
a. International interest arbitrage (the ability to borrow in low-rate markets and deposit in higher-rate markets) would cause investors to sell domestic currency assets and purchase foreign assets based in other currencies.
b. A nation's central bank controls both interest rates and exchange rates. Unfortunately, they do not have sufficient funds to take care of both at the same time.
c. When interest rates fall, borrowing is cheaper, spending and GDP rise and so do exports, thus causing the exchange rate to appreciate.
d. In the short run, exchange rates have to adhere to PPP; otherwise, traders will make profits by purchasing in the cheap market and selling in the more expensive
market, thus aligning exchange rates at the proper level
Ans: a. International interest arbitrage (the ability to borrow in low-rate markets and deposit in higher-rate markets) would cause investors to sell domestic currency assets and purchase foreign assets based in other currencies.
You might also like to view...
Endogenous growth theory tries to explain why
A) the growth rate of technological change varies across countries. B) capital is not subject to diminishing marginal returns. C) total factor productivity is the only determinant of labor productivity. D) balanced growth occurs in all economies.
The existence of an inflationary gap should cause
a. wages to fall. b. prices to fall. c. unemployment to rise. d. net exports to rise.
When policymakers set prices by legal decree, they
a. are usually following the advice of mainstream economists. b. improve the organization of economic activity. c. obscure the signals that normally guide the allocation of society's resources. d. are demonstrating a willingness to sacrifice fairness for the sake of a gain in efficiency.
Why is inflation unpopular?
a. It makes financial planning more difficult. b. It leads to shortages in the economy. c. It increases interest on loans. d. It leaves too much time for production.