In a flexible exchange rate regime, an increase 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, an increase in the foreign interest rate will lead to an increase in the demand for foreign currency as investors seek to take advantage of the higher returns. This increase in demand for foreign currency will lead to an upward pressure on the exchange rate, causing a depreciation of the domestic currency. As a result, net exports will increase, causing the IP curve to shift to the left/up.

In a Flexible Exchange Rate Regime, an Increase in the Foreign