Question

If you observe a rise in interest rate in US according to your learning in international economics how would you expect its impact on exchange rate? Will it lead to depreciation or appreciation of US dollars?which models are relevant for your argument

Answer 1

Answer : When interest rate rise in U.S. then this increase the value of U.S. currency. This means that the returns of investment in U.S. is higher. This attract more foreign investment in U.S. As a result, the exchange rate rise.

As higher interest rate increases the value of U.S. dollar, hence this increases the demand for U.S. dollar. As a result, U.S. dollar appreciate. Therefore, here higher interest rate appreciates the U.S. dollar.

Interest Rate Parity model, Purchasing Power Parity model, monetary policy model and Exchange Rate model are relevant to the above discussed argument.