Which of the following would you expect to increase both interest rates and exchange rates?
A)expansionary monetary policy
B)contractionary monetary policy
C)expansionary fiscal policy
D)Both B and C will increase both interest rates and exchange rates.

Question

Quizplus · Accepted Answer

Contractionary monetary policy typically leads to higher interest rates as the central bank aims to reduce inflation by decreasing the money supply. This can attract foreign investors looking for higher returns, thus increasing the demand for the domestic currency and raising its exchange rate. Expansionary fiscal policy, which involves increasing government spending or decreasing taxes, can also lead to higher interest rates as the government competes for the same pool of available funds in the economy, potentially crowding out private investment. The increased demand for money can lead to higher interest rates. Additionally, if the fiscal expansion leads to expectations of higher future economic growth, it can attract foreign investment, increasing the demand for the domestic currency and thus its exchange rate.

Which of the Following Would You Expect to Increase Both