Any central bank policy that influences the domestic interest rate will:

Question

Quizplus · Accepted Answer

Any central bank policy that influences the domestic interest rate will have an effect on the exchange rate because it will affect the demand for and supply of the domestic currency. If the interest rate is increased, foreign investors will be more attracted to the domestic currency, increasing the demand for it and thus appreciating its value. Conversely, if the interest rate is decreased, foreign investors will be less attracted to the domestic currency, decreasing the demand for it and thus depreciating its value. This applies regardless of whether exchange rates are flexible or fixed.

Any Central Bank Policy That Influences the Domestic Interest Rate