Question

Foreign Exchange Market

Answer 1

A, it is in the sentence directly above the last sentence

Answer 2

The correct answer is A.

Interest rate differentials between two countries affect the value of the exchange rate between the currencies of those two countries.

The country which has the largest interest rate, attracts both domestic and foreign investors, as they all want to earn a retribution as high as possible. If they invest their money in operations that promise higher interests, they would earn higher profits.

Therefore, investors from the country with lower interest rates exchange their domestic currency, increasing its supply on the monetary markets, for the foreign currency, increasing the demand of the latter in the monetary markets, in order to be able to invest in the country with more favourable interest rates. As a result of these money movements, the currency from the country with attractive interests rates appreciates against the currency of the country with less attractive rates.