In an open economy under flexible exchange rates, an increase in the interest rate will cause an increase in which of the following?
A) Output.
B) Investment.
C) The exchange rate.
D) Government spending.
E) Consumption.

Question

Quizplus · Accepted Answer

An increase in the interest rate makes domestic financial assets more attractive to foreign investors, leading to an inflow of foreign capital. This increases the demand for the domestic currency, causing its value to appreciate. Hence, the exchange rate increases.

In an Open Economy Under Flexible Exchange Rates, an Increase