An increase in a country's interest rate would necessitate which of the following actions by a central bank that did not want the nominal exchange rate to change?
A) An immediate adoption of exchange controls
B) The engineering of an exchange-rate shock
C) The buying of foreign exchange
D) The selling of foreign exchange
E) banning imports

Question

Quizplus · Accepted Answer

To prevent the nominal exchange rate from changing in response to an increase in interest rates, a central bank would buy foreign exchange. This action increases the supply of the domestic currency in the foreign exchange market, countering the appreciation that would otherwise occur due to higher interest rates attracting foreign capital.

An Increase in a Country's Interest Rate Would Necessitate Which