If the central bank of Sri Lanka increases interest rates and the Reserve Bank of Australia decreases interest rates. Ceteris paribus, we should expect

Question

BlackTom AI · Accepted Answer

Higher domestic interest rates attract foreign capital (increasing demand for that currency), while lower domestic interest rates tend to drive capital out (reducing demand for that currency). This interest-rate channel explains the expected exchange-rate movements.

1. Relevant knowledge points and concepts
- Interest rate differentials affect capital flows: higher interest rates in a country attract foreign investors seeking higher returns; they must buy that country’s currency to invest, increasing demand and causing appreciation. Conversely, lower interest rates make assets less attractive, reducing demand for that currency and causing depreciation.
- Exchange rates reflect relative supply and demand between two currencies; a change in one country’s rate relative to the other changes their bilateral value.

2. Step-by-step reasoning
- Sri Lanka raises interest rates → foreign investors and domestic savers shift into Sri Lankan assets → demand for Sri Lankan rupee (LKR) rises → LKR appreciates.
- Australia lowers interest rates → Australian assets become less attractive → some capital flows out, selling Australian dollars (AUD) → AUD depreciates.
- These two movements are the same statement viewed from opposite perspectives: “AUD falls relative to LKR” and “LKR rises relative to AUD.”

3. Numerical illustration (intermediate steps)
- Suppose initially 1 AUD = 100 LKR.
- After the change, increased demand for LKR and decreased demand for AUD might move the rate to 1 AUD = 80 LKR.
- Interpretation: AUD has fallen in value versus LKR; LKR has risen in value versus AUD.

4. Why the correct answer is correct
Both outcomes described in options A and B are simultaneous and equivalent: AUD depreciates relative to LKR (A) is the same as LKR appreciates relative to AUD (B). Both follow directly from the interest-rate differential and resulting capital flows.

5. Why other options are incorrect
- Option C (both currencies fall) is incorrect in bilateral terms because one currency’s fall against the other implies the other rises; both cannot fall relative to each other simultaneously.
- Options A and B individually are true, but option D correctly states both are true.

6. Conclusion
Therefore, the correct choice is d. Both A and B are correct.

If the central bank of Sri Lanka increases interest rates and the Reserve Bank of Australia decreases interest rates. Ceteris paribus, we should expect单项选择题

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