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In: Economics

What impact might a decrease in the U.S. federal budget deficit have on interest rates and...

What impact might a decrease in the U.S. federal budget deficit have on interest rates and exchange rates in the market for the U.S.​ dollar? (Assume the exchange rate is stated in terms of foreign currency per U.S.​ dollar.)

A.

Interest rates decrease and exchange rates increase.

B.

Interest rates increase and exchange rates decrease.

C.

Interest rates and exchange rates decrease.

D.

Interest rates and exchange rates increase.

Solutions

Expert Solution

The answer is: C). Interest rates and exchange rates decrease.

Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The opposite relationship exists for decreasing interest rates that is, lower interest rates tend to decrease exchange rates.

Rahul Sunny answered 2 years ago
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