Through the international transmission mechanism, higher interest rates decrease exports and increase imports.

Question

Quizplus · Accepted Answer

When interest rates increase in a country, its currency becomes more attractive to foreign investors who seek higher returns. This increases demand for the currency and its value goes up, which in turn makes exports more expensive and imports cheaper. This causes a decrease in exports and an increase in imports, ultimately leading to a trade deficit.

Through the International Transmission Mechanism, Higher Interest Rates Decrease Exports