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Scenario: Gizmovia II
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 $0.75.
-(Scenario: Gizmovia II) Look at the scenario Gizmovia II. 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.

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Quizplus · Accepted Answer

Decreasing interest rates would make holding gizmos less attractive, leading to increased capital outflows, which would help depreciate the currency to the desired exchange rate.

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