CIMA BA1 · Chapter 2 · Question 8 of 10
A central bank raises its policy interest rate. Assuming other things remain equal, which of the following is the most likely consequence?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) The domestic currency tends to appreciate, making exports less price-competitive
Explanation
Higher interest rates attract inflows of short-term capital, increasing demand for the currency so it tends to appreciate; exports become dearer to foreign buyers. Higher rates also make borrowing more expensive, reduce asset prices and discourage investment.
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