In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen current and markets

Question

Quizplus · Accepted Answer

An increase in the lending rate by the central bank would incentivize foreign investors to invest in Iceland's krona by having a higher return. This would lead to an increase in the supply of krona in the foreign exchange market. However, this policy was implemented to "prop up" the country's economy, suggesting that the demand for krona was falling. Therefore, there must have been a leftward shift in the supply curve for krona, indicating a decrease in the quantity supplied at any given exchange rate.

In October 2008, Iceland's Central Bank Increased Its Lending Rate