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Scenario: Gizmovia
The Republic of Gizmovia wants to maintain the exchange rate of its currency, the gizmo, at $0.50, but the current exchange rate for the gizmo is $0.40.
-(Scenario: Gizmovia) Look at the scenario Gizmovia. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50, it should _____ interest rates, which will _____ capital outflows of gizmos.

Question

Quizplus · Accepted Answer

To maintain the exchange rate of the gizmos at $0.50, Gizmovia needs to increase interest rates to make holding gizmos more attractive to investors. This will decrease capital outflows of gizmos as investors will be more likely to hold onto their gizmos instead of exchanging them for other currencies.

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