Under a floating exchange rate regime, raising the interest rate does NOT:

Question

Quizplus · Accepted Answer

Raising interest rates under a floating exchange rate regime typically attracts foreign capital due to higher returns, thus reducing capital outflows (B) and potentially appreciating the domestic currency, which can make imports cheaper (A) and exports more expensive in foreign markets (D), potentially reducing them. However, higher interest rates generally make borrowing more expensive, which can decrease domestic investment spending (C), not increase it.

Under a Floating Exchange Rate Regime, Raising the Interest Rate