Albania wants to maintain its exchange rate of $0.20 per lek. However, the market for lek per U.S. dollar has determined an exchange rate of $0.14 per lek (depreciation of the lek against the U.S. dollar). The Albanian central bank decides to increase the domestic interest rates through a contractionary monetary policy. This would shift the:
A)supply of lek to the left and cause the lek to lose value.
B)supply of lek to the right and cause the lek to lose value.
C)demand of lek to the right and cause the lek to gain value.
D)demand of lek to the left and cause the lek to lose value.

Question

Quizplus · Accepted Answer

Increasing domestic interest rates would make lek-denominated assets more attractive to investors, increasing the demand for lek and causing it to appreciate in value.

Albania Wants to Maintain Its Exchange Rate of $0