When the Federal Reserve increases the Federal funds rate, the U.S. interest rate differential__________ and the U.S. exchange rate__________ .

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the Federal funds rate, it makes borrowing more expensive, reducing demand for credit. This reduced liquidity pushes up interest rates, making investment in the country more attractive. As a result, there is an increase in the value of the U.S. dollar, causing an appreciation in exchange rates. Therefore, the U.S. interest rate differential rises, and the U.S. exchange rate appreciates.

When the Federal Reserve Increases the Federal Funds Rate, the U.S