Higher interest rates boost currency demand

Steps:

• Exchange rate rises when demand for a country's currency increases relative to supply.
• Factors like interest rates affect capital flows, influencing currency demand.
• Higher domestic interest rates attract foreign investors seeking better returns.
• This increases foreign demand for the currency to buy assets, appreciating its value.

Why C is correct:

• Rising interest rates draw capital inflows, increasing demand for the domestic currency per the interest rate parity theory, which links interest differentials to exchange rate expectations.

Why the others are wrong:

• A: A fall in direct taxes boosts domestic spending but may widen trade deficits, pressuring the currency to depreciate.
• B: A fall in export orders reduces foreign demand for the currency, causing depreciation.
• D: A rise in imports increases supply of domestic currency to buy foreign goods, leading to depreciation.

Final answer: C