If the target exchange rate of a fixed currency is above the equilibrium exchange rate, to reach the target rate, the government should raise interest rates.

Question

Quizplus · Accepted Answer

To achieve a target exchange rate above the equilibrium rate, the demand for the currency needs to increase. One way to achieve that is by increasing interest rates, which attracts more foreign capital seeking higher returns, and hence increases the demand for the currency, pushing its value up to the target exchange rate.

If the Target Exchange Rate of a Fixed Currency Is