In an open economy with few capital restrictions and substantial import-export trade,a rise in interest rates and a decline in the producer price index of inflation will
A) raise the value of the currency
B) lower the nominal interest rate
C) increase the volume of trading in the foreign exchange market
D) lower the trade-weighted exchange rate
E) increase consumer inflation.

Question

Quizplus · Accepted Answer

A rise in interest rates makes assets denominated in that currency more attractive to foreign investors, which increases the demand for the currency and thus raises its value. A decline in the producer price index of inflation indicates a decrease in the cost of production which makes exports cheaper hence increasing its demand. An increase in demand for exports also increases the demand for the country's currency which would increase the value of the currency.

In an Open Economy with Few Capital Restrictions and Substantial