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Which of the following effect is likely to be caused by an increase in interest rates?
(i) Decrease inflation on imports
(ii) Increase demand pull inflation
(iii) Increase inflation on imports
(iv) Decrease demand pull inflationI understand the relation between increase in interest rates and decrease in demand pull inflation but i don’t understand why it effect the decrease inflation on imports. What is the relation between between them.
Thanks in advance, Sir.
If interest rates go up in a country ots currency strengthens because lots of poeple buy into it the get the good interest rate.
If your currency strengtherns, imports become cheaper. Therefore (i) above applies.
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