The FE curve has a:
A)negative slope because an increase in domestic interest rates leads to capital inflows causing a surplus in the official settlements balance.A decrease in output levels is thus needed to reduce that surplus.
B)positive slope because a decrease in domestic interest rates leads to capital outflows causing a surplus in the official settlements balance.An increase in output levels is thus needed to reduce that surplus.
C)positive slope because an increase in domestic interest rates leads to capital inflows causing a surplus in the financial account balance.An increase in output levels is thus needed to reduce that surplus.
D)negative slope because an increase in domestic interest rates leads to capital outflows causing a deficit in the financial account balance.An increase in output levels is thus needed to reduce that deficit.

Question

Quizplus · Accepted Answer

The FE (Foreign Exchange Market Equilibrium) curve has a positive slope because an increase in domestic interest rates attracts capital inflows, leading to a surplus in the financial account balance. To reduce this surplus, an increase in domestic output is necessary, which increases the demand for imports and thus balances the financial account.

The FE Curve Has A