If U.S.interest rates rise while foreign interest rates remain unchanged,
A)GDP will not change since the shift in aggregate supply cancels the positive effects on aggregate demand.
B)the dollar will depreciate and thus reduce prices and output.
C)foreign capital will be attracted to the United States and the dollar will appreciate.
D)net exports will increase and the economy will expand.

Question

Quizplus · Accepted Answer

When U.S. interest rates rise while foreign interest rates remain unchanged, capital flows tend to move toward the United States as investors seek higher returns. This increases the demand for dollars, causing the dollar to appreciate. As a result, U.S. exports become more expensive and imports become cheaper, which may reduce net exports and potentially contract the economy.

If USInterest Rates Rise While Foreign Interest Rates Remain Unchanged