When exchange rates are fixed and the foreign nation's interest rate increases, what happens next?
A) The home nation's IS curve shifts out because of a depreciation and an increase in the trade balance.
B) The home nation's LM curve shifts right, and its interest rate falls.
C) Fixed exchange rates force the home nation to raise its interest rates.
D) The home nation and the foreign nation are always in equilibrium, so no changes occur.
Ans: C) Fixed exchange rates force the home nation to raise its interest rates.
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