Consider a scenario where the Bank of England views the UK economy as overheating and is attempting to slow it down using monetary policy. Which of the following statements regarding the effects of an interest rate rise via the exchange rate channel is correct?

A. Lower interest rates attract international investors, which in turn raises demand for GBP, leading to a depreciation of the GBP.
B. An interest rate rise leads to higher bond prices, which results in higher demand for UK bonds.
C. An interest rate rise leads to UK imports being cheaper and exports more expensive, which depresses aggregate demand in the UK.

Question

23-06-2025
Business

High School

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Consider a scenario where the Bank of England views the UK economy as overheating and is attempting to slow it down using monetary policy. Which of the following statements regarding the effects of an interest rate rise via the exchange rate channel is correct?

A. Lower interest rates attract international investors, which in turn raises demand for GBP, leading to a depreciation of the GBP.
B. An interest rate rise leads to higher bond prices, which results in higher demand for UK bonds.
C. An interest rate rise leads to UK imports being cheaper and exports more expensive, which depresses aggregate demand in the UK.

Answer :

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dugarniharika9045 dugarniharika9045 · Answer 1 · 2024-11-18T22:38:34-05:00

In the scenario where the Bank of England believes the UK economy is overheating and wants to cool it down using monetary policy, an interest rate rise can have effects through the exchange rate channel.

The correct statement regarding the effects of an interest rate rise via the exchange rate channel is that it leads to UK imports being cheaper and exports more expensive, which depresses aggregate demand in the UK.

When the Bank of England increases interest rates, it attracts international investors seeking higher returns on their investments. As a result, there is an inflow of foreign capital into the UK, increasing the demand for GBP. This higher demand for contingent liabilities GBP causes an appreciation of the currency, making imports cheaper and exports more expensive. Consequently, this leads to a decrease in aggregate demand within the UK economy, as higher prices for exports can reduce foreign demand and cheaper imports can discourage domestic production.

This policy action aims to reduce the overheating of the economy by curbing domestic demand through higher costs of imports and potentially lower export competitiveness.

Learn more about contingent liabilities here: brainly.com/question/29870964

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