Under floating exchange rates, relatively low domestic interest rates tend to promote the depreciation of a currency's exchange value, while relatively high domestic interest rates lead to currency appreciation.

Question

Quizplus · Accepted Answer

This is known as the interest rate parity theory, which suggests that higher interest rates attract foreign investors, increasing demand for the currency and leading to appreciation, while lower interest rates discourage foreign investment and lead to depreciation.

Under Floating Exchange Rates, Relatively Low Domestic Interest Rates Tend