With the foreign interest rate in the IS model, an increase in the domestic interest rate causes ________ because ________.

Question

Quizplus · Accepted Answer

An increase in the domestic interest rate leads to an appreciation of the domestic real exchange rate and causes a decline in domestic investment. This is because a higher interest rate makes domestic assets more attractive to foreign investors, increasing the demand for domestic currency and causing its value to rise. This, in turn, causes exports to become more expensive and imports to become cheaper, leading to a decline in net exports and a leftward movement along the IS curve.

With the Foreign Interest Rate in the IS Model, an Increase