In a flexible exchange rate regime, a decrease in the foreign interest rate will cause:
A) the IP curve to shift to the right/down.
B) the IP curve to shift to the left/up.
C) a movement along the IP curve.
D) the IP curve to become vertical.
E) the IP curve to become horizontal.

Question

Quizplus · Accepted Answer

In a flexible exchange rate regime, a decrease in the foreign interest rate makes domestic assets more attractive, leading to capital inflows and an appreciation of the domestic currency. This appreciation makes domestic goods more expensive relative to foreign goods, reducing net exports and shifting the Investment-Saving (IS) curve, often referred to here as the IP curve for its relation to investment and net exports, to the right/downward as the economy moves towards a lower level of output at any given price level.

In a Flexible Exchange Rate Regime, a Decrease in the Foreign