Lower interest rates depreciate currency, affecting trade prices

Steps:

• Lower interest rates reduce borrowing costs, stimulating economic activity.
• Increased demand for goods boosts money supply, pressuring the domestic currency to depreciate.
• Currency depreciation makes domestic goods cheaper abroad but foreign goods costlier domestically.
• Thus, export prices in foreign currency fall, while import prices rise.

Why D is correct:

• Per the interest rate parity theory, lower rates cause currency depreciation, reducing export prices in foreign markets to boost competitiveness.

Why the others are wrong:

• A: Cheaper borrowing encourages firms to invest more, increasing borrowing.
• B: Lower rates make loans affordable, raising consumer spending on big-ticket items.
• C: Depreciation increases import prices as foreign goods become more expensive in domestic currency.

Final answer: D