Multiple Choice Questions on Country A is a small open economy An external shock led to the immediate appreciation of its currenc........... for SEBI Grade A ( Officer) Exam Preparation

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Multiple Choice Questions

Country A is a small open economy An external shock led to the immediate appreciation of its currenc...........

Economics- Phase (I & II) Inflation and Phillips Curve 
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    Country A is a small open economy. An external shock led to the immediate appreciation of its currency with respect to the United States Dollar. Investor’s expectations are not affected. What happens to interest rate in Country A. 

    Increase 

    Correct Answer

    Decrease 

    Incorrect Answer

    Unchanged

    Incorrect Answer

    Uncertain

    Incorrect Answer
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    Explanation:

    Recall the interest parity condition 

     

    The situation above correspond to an increase in Et. Note that since we assume investor expectation are not affected, thus   does not change.

    Since  is exogenous,  has to adjust for the solution to hold by increasing. 

    By: Jyoti Das
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