Which of the following policies help to raise interest rate unambiguously and thereby lead to appreciation of currency?
- AOption (a)
Expansionary fiscal and monetary policy
- BOption (b)
Contractionary fiscal and monetary policy
- COption (c)
Contractionary fiscal policy and expansionary monetary policy
- DOption (d)
Contractionary monetary policy and expansionary fiscal policy
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Correct answer
Contractionary monetary policy and expansionary fiscal policy
Why this answer is correct
The correct answer is Contractionary monetary policy and expansionary fiscal policy
Key PointsContractionary monetary policy typically involves increasing interest rates to curb inflation or slow down an overheating economy. By increasing interest rates, borrowing costs become higher, which tends to reduce spending and investment. This can also attract foreign investment due to higher returns, leading to the appreciation of the currency.
Expansionary fiscal policy, on the other hand, involves increasing government spending and/or cutting taxes to stimulate the economy. This can lead to higher economic growth. However, when combined with contractionary monetary policy, the increase in interest rates can still attract foreign investment, contributing to the currency's appreciation. This combination also manages the inflation that could result from the expansionary fiscal policy, making the combination a balanced approach for managing an economy.
Therefore, the correct answer is option 4: Contractionary monetary policy and expansionary fiscal policy, as it unambiguously helps raise interest rates and can lead to currency appreciation