Question : A decrease in interest rates in a country is likely to result in:
Option 1: Appreciation of the domestic currency
Option 2: Depreciation of the domestic currency
Option 3: No impact on the exchange rate
Option 4: Unpredictable fluctuations in the exchange rate
Correct Answer:
Depreciation of the domestic currency
Solution : A decrease in interest rates in a country is likely to result in a depreciation of the domestic currency. This is because lower interest rates make a country's assets, such as bonds and bank deposits, less attractive to foreign investors, who will seek higher returns elsewhere. As a result, the demand for the domestic currency decreases, causing its value to decline relative to other currencies.
Conversely, an increase in interest rates in a country is likely to result in an appreciation of the domestic currency, as higher interest rates make a country's assets more attractive to foreign investors and increase demand for the domestic currency.
