Higher interest rates curb imports via reduced demand

Steps:

• Raising interest rates increases borrowing costs for households and firms.
• Higher costs reduce spending on consumption and investment.
• Lower domestic aggregate demand decreases demand for imported goods.
• Fewer imports improve net exports, reducing the trade deficit.

Why D is correct:

• In the trade balance formula (exports - imports), reduced aggregate demand directly lowers imports by curbing overall spending, per Keynesian economics.

Why the others are wrong:

• A: Higher rates attract foreign capital inflows, worsening the current account deficit via currency appreciation that hurts exports.
• B: Higher rates boost, not lower, foreign direct investment inflows seeking better returns.
• C: Higher rates raise borrowing costs, discouraging domestic capital investment.

Final answer: D