Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
An increase in interest rates typically leads to a decrease in exports and an increase in imports.
B
Lower interest rates generally increase exports while decreasing imports.
C
Changes in monetary policy have no significant effect on trade balances under flexible exchange rates.
D
An increase in interest rates always results in a stronger currency, decreasing exports and increasing imports.
Understanding the Answer
Let's break down why this is correct
Answer
In a flexible exchange rate system, the value of a country's currency can change based on supply and demand. When a central bank changes monetary policy by raising interest rates, it often leads to a stronger currency because higher rates attract foreign investors seeking better returns. A stronger currency makes imports cheaper and exports more expensive, which can lead to an increase in imports but a decrease in exports. For example, if the U. S.
Detailed Explanation
When interest rates go up, borrowing money becomes more expensive. Other options are incorrect because This option suggests that lower interest rates always boost exports; This choice claims that monetary policy changes do not affect trade.
Key Concepts
monetary policy
interest rates
impact on imports and exports.
Topic
Flexible Exchange Rates
Difficulty
hard level question
Cognitive Level
understand
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