Raising Currency Value via Monetary Policy

Steps:

• Identify goal: Appreciating the currency increases its external exchange rate value.
• Recall exchange rate determinants: Demand for currency rises with capital inflows; supply rises with imports or outflows.
• Evaluate policies: Focus on actions boosting demand for domestic currency.
• Select best: Higher interest rates attract foreign investment, increasing demand.

Why B is correct:

• Raising interest rates draws foreign capital seeking higher returns, boosting demand for the domestic currency and causing appreciation (per interest rate parity theory).

Why the others are wrong:

• A: Discouraging inward FDI reduces capital inflows, lowering demand for the currency and causing depreciation.
• C: Raising aggregate demand increases imports and inflation, raising currency supply and causing depreciation.
• D: Removing import quotas boosts imports, increasing foreign currency supply and depreciating the domestic currency.

Final answer: B