ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country’s currency. Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency’s relative value.

Detailed explanation-2: -Hot money continuously shifts from countries with low-interest rates to those with higher rates. These financial transfers affect the exchange rate and potentially impact a country’s balance of payments.

Detailed explanation-3: -An increase in the interest rate reduces the quantity of money demanded. A reduction in the interest rate increases the quantity of money demanded. The demand curve for money shows the quantity of money demanded at each interest rate.

Detailed explanation-4: -Higher interest rates translate to a lower supply of money in the economy. Since the supply of money depletes, it raises borrowing costs, which makes it more expensive for consumers to hold debt.

Detailed explanation-5: -As the interest rate rises, money demand will fall. Once it falls to equal the new money supply, there will be no further difference between the amount of money people hold and the amount they wish to hold, and the story will end. This is why (and how) a decrease in the money supply raises the interest rate.