Question

V) Discuss the effects of a rise in the dollar interest rate on the exchange rate. (3 points)

Answer 1

Interest rates and exchange rates both do impact on each other in important ways.if interest rates rises up it indicates that a country's currency becoming more valuable.From a investor's perspective investing in that country yields better returns.So foreign investment in that country would increase thus it would create more demand of that country's currency.when demand of any currency goes up comparing to another currency , it strengthen the value of that currency and when this happens , its exchange rates improves.strong exchange rates affect positively to importers because they get more on their imports and negatively to exporters because they have to pay more.
The reverse is also true , if interest rates falls down it indicates that country's currency losing its value. So this means Low Returns from investment , thus Foreign investment will decrease , because of this demand of currency will decrease . This leads to its depreciation and this makes import more expensive and export more profitable. That conditions can leads inflation and slow down.