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Capital Flows and Currency Value
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How do changes in interest rates, as a component of monetary policy, typically affect capital flows and the value of a currency?

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Choose the Best Answer

A

Higher interest rates attract foreign capital, increasing currency value.

B

Lower interest rates attract foreign capital, decreasing currency value.

C

Interest rates have no impact on capital flows or currency value.

D

Higher interest rates lead to decreased foreign investment, lowering currency value.

Understanding the Answer

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Answer

Changes in interest rates can have a significant impact on capital flows and the value of a currency. When a country's central bank raises interest rates, it often attracts foreign investors looking for better returns on their investments. This increased demand for the country's assets can lead to higher capital inflows, which often strengthens the currency's value. For example, if the United States increases its interest rates, more investors may buy U. S.

Detailed Explanation

When interest rates are high, they offer better returns for investors. Other options are incorrect because Some might think lower interest rates attract money; It's a common mistake to think interest rates don't matter.

Key Concepts

interest rates
monetary policy.
Topic

Capital Flows and Currency Value

Difficulty

medium level question

Cognitive Level

understand

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