Scenario: Gizmovia II The Republic of Gizmovia wants to maintain the exchange rate of its currency, the gizmo, at $0.50, but the current exchange rate for the gizmo is $0.75. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50, it should _____ interest rates, which will _____ capital inflows of gizmos.

Question

Quizplus · Accepted Answer

Decreasing interest rates will make the gizmo less attractive to foreign investors, reducing capital inflows and thus depreciating the currency to the desired exchange rate.

Scenario: Gizmovia II the Republic of Gizmovia Wants to Maintain