Question

In: Economics

Consider a country in a regime with flexible exchange rates. Keeping the foreign interest rate constant, an increase in the domestic real interest rate is likely to generate

Consider a country in a regime with flexible exchange rates. Keeping the foreign interest rate constant, an increase in the domestic real interest rate is likely to generate

(a) A depreciation of the domestic currency.

(b) A decline in net exports.

(c) An outflow of capital (domestic investors prefer to invest abroad).

(d) Fewer investment made in the country by foreigners.

Solutions

Expert Solution

Let suppose the ISLM model.

If our domestic currency is depreciated, it means goods and services in home country is become cheaper for foreign people. So thr demand for domestic goods and services will go up, which leads to shift IS curve upwards to the right causing interest rate to rise.

so Ans is (A)

Rahul Sunny answered 2 years ago
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