The central bank of Country A raised its interest rate to help the domestic economy

Economics Nov 28, 2020

The central bank of Country A raised its interest rate to help the domestic economy. At the same time, financial investors in country A were happy that A's financial assets were more profitable than the assets in Foreign countries. Answer if country A was fixing the exchange rate or not.

Expert Solution

Given that country A's interest rate has increased, as a result investment in the country have become more profitable. Now as the investments increases, this will lead to increase in prices. However, if an increase in interest rate leads to rise in inflation, then exchange rate will fall. But if the change doesn't lead to inflation, then exchange rate will rise.

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