In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen currency and markets." (www.nytimes.com, October, 29, 2008) As a result, the ________ and demand curve for Icelandic krona shifted ________, holding all else the same.

Question

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The increase in Iceland's lending rate to 18% would make investments in Icelandic assets more attractive, increasing the demand for the krona. This would also increase the interest rate differential between the U.S. and Iceland, assuming U.S. rates remained constant, thus shifting the demand curve for krona rightward.

In October 2008, Iceland's Central Bank Increased Its Lending Rate