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, which tends to increase the U.S. interest rate differential with other countries (as U.S. rates become relatively higher). This, in turn, typically leads to an appreciation of the U.S. exchange rate as higher interest rates attract foreign capital, increasing demand for the dollar.

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