In October 2008, Icelandʹs central bank increased its lending rate to 18% in an ʺeffort to prop up the countryʹs frozen current and markets.ʺ www.nytimes.com, October, 29, 2008)
As a result, there was _________, holding all else the same.

Question

Quizplus · Accepted Answer

When Iceland's central bank increased its lending rate to 18%, it made domestic assets more attractive to foreign investors, who would want to invest in the country and get higher interest rates. This would lead to an increase in the demand for the krona, causing an appreciation of the currency. However, the high interest rates would also discourage domestic firms from borrowing and investing, leading to a decrease in the supply of krona. Therefore, there would be a leftward shift in the supply curve for krona.

In October 2008, Icelandʹs Central Bank Increased Its Lending Rate