ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate. Higher inflation typically leads to higher interest rates. 4 Whether or not this results in a stronger currency or a weaker currency is not clear.

Detailed explanation-2: -Global trade High interest rates tend to bring in capital and support the foreign exchange rate. A country’s central bank may therefore opt to change interest rates to try and influence the exchange rate and give the economy a boost. In theory, higher interest rates should attract more foreign investment from abroad.

Detailed explanation-3: -When a country’s exchange rate increases relative to another country’s, the price of its goods and services increases. Imports become cheaper. Ultimately, this can decrease that country’s exports and increase imports.

Detailed explanation-4: -The Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and subsequent inflation, reducing purchasing power and undermining the sustainability of the economic expansion.