ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A higher interest rate gives companies higher returns on savings, hence, the inward attraction of capital takes place. Due to this, the supply of foreign currency would increase, and demand for the dollar would increase. The rise in demand for the dollar makes it valuable and hence the value of the dollar increases.

Detailed explanation-2: -Q. Which of the following is most likely to cause an increase in the international value of the dollar? expansionary monetary policy in the U.S.

Detailed explanation-3: -The answer is to control inflation. As interest goes high. The interest rate of saving accounts, FD also increased, credit cards, home loan interest goes high, people invest more than spending, circulation of the money goes down in the market, and demand goes down as a result price comes down.

Detailed explanation-4: -Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.

Detailed explanation-5: -In an idealised example, when interest rates rise, investors are attracted to a currency and invest in it more heavily. As more investors are attracted, demand for the currency increases, and its value goes up. These flows of investment are known in economics as ‘hot money flows’.