Someone just asked me this: Higher interest rate leads to higher exchange rate ,and it reduces cost of production for firms which need imported raw materials and therefore improve the expectation of these firms and more investment and shift LRAS to the right and economy growth .etc. so increase interest rate also is a way to improve economy ?
am I right ?
Is the individual correct? Im not sure.
Quick Economics questions Watch
- Thread Starter
- 07-04-2013 18:36
- 07-04-2013 19:24
Higher IR -> foreigners want to put money into the country to benefit from them -> The exchange rate does go up as more people demand the pound on the FX market.
Higher ER -> the pound is stronger and so can buy more other currency -> import costs do go down.
I am not sure about investment though tbh. For one, higher IR means borrowing money to invest is more expensive and second not sure how reduced cost necessarily implies more investment. Also exports will be more expensive so while importers have reduced costs, exporters might suffer so the effect on LRAS is ambiguous imo as well.