An increase in interest rates
A)increases the value of the dollar,net exports,and equilibrium output.
B)increases the value of the dollar,reducing net exports and equilibrium output.
C)reduces the value of the dollar,net exports,and equilibrium output.
D)reduces the value of the dollar,increasing net exports and equilibrium output.

Question

Quizplus · Accepted Answer

An increase in interest rates leads to an increase in the value of the dollar because it makes the U.S. more attractive to foreign investors seeking higher returns on their investments. However, this increase in the dollar's value also makes U.S. exports more expensive, resulting in a reduction in net exports. This reduction in net exports, in turn, leads to a decrease in equilibrium output. Therefore, an increase in interest rates increases the value of the dollar but reduces net exports and equilibrium output.

An Increase in Interest Rates