Chapter 43, Problem 5MCQ

To determine

The correct option for monetary policy that decreases the interest rate.

Answer to Problem 5MCQ

Option d is correct.

Explanation of Solution

Explanation for the correct option:

d.

By lowering the interest rate, the money outflow will increase as investors would no longer be interested in investing in domestic currency. This will result in the depreciation of the currency value. Also, exports will increase and imports will decrease. Therefore, option d is correct.

Explanation for incorrect options:

a.

Domestic currency by reducing the interest rate will depreciate instead of appreciating. Therefore, option a is the incorrect answer.

b.

Due to the lower value of the currency exports will increase. Therefore, option b is incorrect.

c.

Imports will reduce as domestic currency becomes cheaper resulting in cheaper goods and services than abroad. Therefore, option c is incorrect.

e.

Inflation cannot be prevented by lowering the interest rate. Therefore, option e is incorrect.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.