A decrease in the foreign interest rate relative to the domestic interest rate _____ the exchange rate value of a foreign currency in the short run.
A)raises
B)lowers
C)does not affect
D)causes fluctuations in

Question

Quizplus · Accepted Answer

If the foreign interest rate decreases relative to the domestic interest rate, then investors will be less incentivized to invest in the foreign market and more likely to invest in the domestic market. This increases demand for the domestic currency, causing its value to appreciate and the foreign currency to depreciate. Therefore, this option lowers the exchange rate value of a foreign currency in the short run.

A Decrease in the Foreign Interest Rate Relative to the Domestic