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 outflows of gizmos.

Question

Quizplus · Accepted Answer

To lower the exchange rate from $0.75 to $0.50, Gizmovia should decrease interest rates. Lower interest rates make investments in Gizmovia less attractive, leading to an increase in capital outflows as investors seek higher returns elsewhere, which in turn increases the supply of gizmos in the foreign exchange market, lowering its value.

Scenario: Gizmovia II the Republic of Gizmovia Wants to Maintain