Any central bank policy that influences the domestic interest rate will:

Question

Quizplus · Accepted Answer

Central bank policies that affect domestic interest rates will also impact the demand for and supply of domestic currency, which can cause changes in the exchange rate. Therefore, option B is the correct choice. Option A is incorrect because even with flexible exchange rates, changes to domestic interest rates can still impact exchange rates. Option C is also incorrect because changes in interest rates can affect the demand for and supply of domestic currency. Option D is incorrect because fixing exchange rates is not the only option for central banks to impact exchange rates.

Any Central Bank Policy That Influences the Domestic Interest Rate