Answer to Question #269830 in Macroeconomics for Night Owl

Question

Q.1.10 When the rand depreciates against the dollar:

(1) The balance on the current account of the balance of payments worsens;

(2) The South African Reserve Bank can influence the exchange rate by raising interest rates to attract foreign capital and thus strengthen the value of the rand;

(3) The South African Reserve Bank can buy dollars to strengthen the value of the rand;

(4) The South African Reserve Bank can take steps to limit the supply of dollars and in this way strengthen the value of the rand relative to the dollar.

Answer 1

Solution:

The correct answer is (2) The South African Reserve Bank can influence the exchange rate by raising interest rates to attract foreign capital and thus strengthen the value of the rand.

 

Higher interest rates generally increase the value of a country's currency. Higher interest rates tend to entice foreign investment, increasing demand for and the value of the home currency.