Why might a country raise interest rates in the face of an ...

[yoroshambo]

Why might a country raise interest rates in the face of an exchange rate crisis?
 
  What will be an ideal response?

Question 2

A series of bank runs in a country should have no effect on M1 as money simply moves from checking deposits to currency.
 
  Indicate whether the statement is true or false

[duke02]

Answer to Question 1

If the value of a country's currency is depreciating rapidly, the country's government can purchase the country's currency in foreign exchange markets in an attempt to boost the value of the currency. However, continuing to purchase currency requires reserves of other currencies (like the dollar), and those reserves are not inexhaustible. The result is that a country has to rely on other sources of increase in value for the currency. By raising interest rates, the country makes investment more attractive to foreigners, increasing the demand for currency, and increasing the equilibrium exchange rate.

Answer to Question 2

FALSE

[yoroshambo]

Thank you

[duke02]

Happy to help you