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Which of the following statements is correct? - An increase in the rate of interest in...

Which of the following statements is correct?

- An increase in the rate of interest in the U.S. leads to an increased demand for US $, which in turn result in a higher value for the US dollar and hence reduced net exports.

- An increase in the rate of interest of the U.S. leads to an increased demand for US $, which in turn results in a lower value for the US dollar and hence reduced net exports.

- An increase in the rate of interest in the U.S. leads to an increased demand for US $, which in turn results in a higher value for the US dollar and hence increased net exports.

- An increase in the rate of interest in the U.S. leads to an increased demand for US $, which in turn results in a lower value for the US dollar and hence increased net exports.

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Answer #1

Option 1: An increase in the rate of interest in the U.S. leads to an increased demand for US $, which in turn result in a higher value for the US dollar and hence reduced net exports.

Explanation: When the rate of interest in the US is higher, it becomes more profitable to invest in the US dollar to earn a higher interest income. Therefore, the demand for US dollars increases and this leads to an increase in the value of the dollar. With the appreciation of the US dollar, exports become less profitable and imports become less costly. So, exports decreases and imports increases. As a result, the net export (export - import) decreases.

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