Domestic interest rates influence the real exchange rate.

Question

Quizplus · Accepted Answer

Domestic interest rates can influence the real exchange rate by affecting the demand for a country's currency. High interest rates may attract foreign investors who want to earn higher returns on their investments, leading to an increase in demand for the currency and a rise in its value. On the other hand, lower interest rates may discourage foreign investors, leading to a decrease in demand for the currency and a fall in its value. This, in turn, affects the competitiveness of a country's exports and imports, thereby impacting the real exchange rate.

Domestic Interest Rates Influence the Real Exchange Rate