A tax credit for purchases of capital goods causes the interest rate to increase and the exchange rate to appreciate.

Question

Quizplus · Accepted Answer

A tax credit for purchases of capital goods increases investment demand, which raises the interest rate due to higher demand for loanable funds. Higher interest rates attract foreign capital, leading to an appreciation of the exchange rate as demand for the domestic currency increases to purchase domestic assets.

A Tax Credit for Purchases of Capital Goods Causes the Interest