2023 · Q41
Which one of the following policies help to raise interest rate unambiguously and thereby lead to appreciation of currency?
General KnowledgeIndian Economy
- AExpansionary fiscal and monetary policy
- BContractionary fiscal and monetary policy
- CContractionary fiscal policy and expansionary monetary policy
- DContractionary monetary policy and expansionary fiscal policy
Explanation
Contractionary monetary policy (raising policy rates, tightening liquidity) unambiguously raises interest rates, and expansionary fiscal policy (larger deficits) also pushes interest rates up through higher government borrowing. The combined effect unambiguously raises rates, attracting capital inflows and appreciating the currency. The other combinations have offsetting effects on interest rates.