The Inclusion of a Strong Correlation Between the Exchange Rate

question 61

Multiple Choice

The inclusion of a strong correlation between the exchange rate and the real rate of interest serves to

• A) make the IS curve steeper because higher interest rates mean higher exchange rates and larger net exports.
• B) make the IS curve flatter because higher interest rates mean higher exchange rates and smaller net exports.
• C) make the LM curve steeper because higher interest rates mean larger inflows of currency and correspondingly greater sensitivity of the demand for money to changes in the interest rate.
• D) make the LM curve flatter because higher interest rates mean higher exchange rates and smaller demand for foreign currencies.
• E) none of the above.

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