An Increase in the Domestic One-Year Interest Rate Expected to Occur

question 39

Multiple Choice

An increase in the domestic one-year interest rate expected to occur in,say,two years will,all else fixed,have which of the following effects in a flexible exchange rate regime?

• A)the real exchange rate will increase with no change in the nominal exchange rate.
• B)the nominal exchange rate will increase with no change in the real exchange rate.
• C)both the real and nominal exchange rate will increase.
• D)no change in either the nominal or real exchange rate.

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Definitions:

Time Inconsistency

A situation where a decision-maker's preferences change over time, often leading to a conflict between long-term goals and short-term gratification.

Package Sizes

The dimensions or amount of product contained within a package, affecting consumer choices and inventory management.

Framing Effects

The influence on decision making prompted by the way information is presented, rather than just the information itself.

Self-Serving Bias

The common human tendency to attribute positive events to one's own character but attribute negative events to external factors.