📚 Learning Guide
Currency Appreciation Mechanisms
easy

If a central bank increasing interest rates is to currency appreciation as a government increasing taxes is to what?

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Choose the Best Answer

A

Decreased consumer spending

B

Increased consumer savings

C

Higher inflation

D

Currency depreciation

Understanding the Answer

Let's break down why this is correct

Answer

When a central bank increases interest rates, it often leads to currency appreciation because higher rates attract foreign investors looking for better returns on their investments. Similarly, when a government increases taxes, it can lead to a decrease in consumer spending and investment, which might result in a weaker economy. This weaker economic outlook can lead to a depreciation of the currency, as investors may move their money elsewhere. For example, if a country raises taxes significantly, people may spend less, and businesses may slow down, making the currency less attractive to investors. In both cases, the changes in interest rates and taxes influence how investors view the strength and stability of the currency.

Detailed Explanation

When taxes go up, people have less money to spend. Other options are incorrect because Some might think higher taxes mean people save more; People might believe that higher taxes cause prices to rise.

Key Concepts

Currency Appreciation Mechanisms
Monetary Policy
Inflation Control
Topic

Currency Appreciation Mechanisms

Difficulty

easy level question

Cognitive Level

understand

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