ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A government wants to keep its currency's exchange rate from falling, and the central bank uses monetary policy to do this. Which action would be MOST likely to support the currency, and what is the main domestic cost?
Raising interest rates is the action that supports the currency, because higher returns attract foreign capital and increase demand for it. The domestic cost is slower economic growth, since dearer borrowing reduces business investment and consumer spending.
- ARaise interest rates to attract foreign capital; the cost is slower domestic growthCorrect
- BLower interest rates to encourage exports; the cost is higher import prices
- CIncrease the money supply to boost demand; the cost is a larger trade surplus
Explanation
Higher interest rates attract foreign investors seeking returns, raising demand for the currency and supporting its value. The cost is that higher borrowing costs reduce domestic investment and consumption, slowing growth. The other options would tend to weaken the currency.
Did you get it right without looking?
One question tells you little. A timed set on Macroeconomic factors shows your real accuracy, how long you take and where you lose marks.
More Macroeconomic factors questions
- A government cuts income tax rates and increases spending on infrastructure in order to stimulate demand during a recession. Which type of p…
- An economy has experienced prices rising by 2% a year, but a government raises the inflation target and wages are indexed to prices. Workers…
- A retailer funds its inventory with a variable-rate bank overdraft. The central bank unexpectedly raises its base rate. Which is the MOST li…
- A government increases its spending on infrastructure and, as a result, interest rates rise because the extra borrowing competes with privat…
- Which statement about the differences between monetary policy and fiscal policy is correct?
- A country's currency appreciates significantly against those of its main trading partners. Which effect on its trade is most likely, other t…