When an increase in domestic interest rates causes the dollar to appreciate, which of the following is false?
A)The dollar price of foreign goods falls.
B)Net exports will fall.
C)The increase in domestic interest rates could cause a reduction in domestic demand.
D)The reduction in aggregate demand increases the demand for imports.

Question

Quizplus · Accepted Answer

When domestic interest rates increase, the dollar appreciates, making foreign goods cheaper in dollar terms (A is true). This can lead to a decrease in net exports as U.S. goods become more expensive abroad and foreign goods become cheaper in the U.S. (B is true). Higher interest rates can dampen domestic investment and consumption, potentially reducing domestic demand (C is true). However, an appreciation of the dollar and a potential reduction in domestic demand would not increase the demand for imports; instead, it might decrease or change minimally, making D false.

When an Increase in Domestic Interest Rates Causes the Dollar