For a major country with extensive capital flows, what is the effect of an increase in interest rates?

Question

Quizplus · Accepted Answer

An increase in interest rates typically leads to a currency appreciation because it makes the domestic currency more attractive to foreign investors seeking higher yields on their investments. This currency appreciation makes exports more expensive and imports cheaper, leading to a reduction in net exports. Therefore, the correct choice is (D) a currency appreciation and reduced net exports.

For a Major Country with Extensive Capital Flows, What Is