{"id":85352,"date":"2025-06-01T03:13:13","date_gmt":"2025-06-01T03:13:13","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=85352"},"modified":"2025-06-01T03:13:13","modified_gmt":"2025-06-01T03:13:13","slug":"which-of-the-following-policies-help-to-raise-interest-rate-unambiguou","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/which-of-the-following-policies-help-to-raise-interest-rate-unambiguou\/","title":{"rendered":"Which of the following policies help to raise interest rate unambiguou"},"content":{"rendered":"

Which of the following policies help to raise interest rate unambiguously and thereby lead to appreciation of currency?<\/p>\n

[amp_mcq option1=”Expansionary fiscal and monetary policy” option2=”Contractionary fiscal and monetary policy” option3=”Contractionary fiscal policy and expansionary monetary policy” option4=”Contractionary monetary policy and expansionary fiscal policy” correct=”option4″]<\/p>\n

\n
\n
This question was previously asked in<\/div>\n
UPSC CDS-1 – 2023<\/div>\n<\/div>\n
Download PDF<\/a>Attempt Online<\/a><\/div>\n<\/div>\n
\nThe correct answer is D) Contractionary monetary policy and expansionary fiscal policy. Contractionary monetary policy (e.g., raising interest rates, selling bonds) directly increases interest rates. Higher interest rates attract foreign capital seeking higher returns, increasing demand for the domestic currency and leading to its appreciation. Expansionary fiscal policy (e.g., increased government spending, lower taxes) increases aggregate demand and can also lead to higher interest rates due to increased government borrowing (crowding out) and increased economic activity, further reinforcing the upward pressure on interest rates and potentially the currency. This combination is known to lead to higher interest rates and currency appreciation in open economies with capital mobility.
\n<\/section>\n
\n– Monetary policy directly influences interest rates and money supply. Contractionary monetary policy raises interest rates.
\n– Fiscal policy influences aggregate demand through government spending and taxation. Expansionary fiscal policy increases demand.
\n– In open economies with capital mobility, higher domestic interest rates relative to foreign rates attract capital inflows, increasing demand for the domestic currency and causing appreciation.
\n– Contractionary monetary policy is the most unambiguous tool to raise interest rates. Combined with expansionary fiscal policy, which also puts upward pressure on rates (via crowding out and demand), it creates a strong force for higher interest rates and currency appreciation.
\n<\/section>\n
\nThis policy mix can lead to a stronger currency and potentially higher interest payments on government debt but may have mixed effects on output depending on the relative strength of the policies and the degree of capital mobility. Option B (Contractionary fiscal and monetary) would also raise interest rates and appreciate the currency but by reducing overall demand, potentially leading to lower output compared to option D. However, option D provides a clearer and more direct path to higher interest rates and appreciation driven by both capital inflow incentives (monetary policy) and potential crowding out\/demand pressures (fiscal policy).
\n<\/section>\n","protected":false},"excerpt":{"rendered":"

Which of the following policies help to raise interest rate unambiguously and thereby lead to appreciation of currency? [amp_mcq option1=”Expansionary fiscal and monetary policy” option2=”Contractionary fiscal and monetary policy” option3=”Contractionary fiscal policy and expansionary monetary policy” option4=”Contractionary monetary policy and expansionary fiscal policy” correct=”option4″] This question was previously asked in UPSC CDS-1 – 2023 Download … <\/p>\n

Detailed SolutionWhich of the following policies help to raise interest rate unambiguou<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1087],"tags":[1105,1120,1190],"class_list":["post-85352","post","type-post","status-publish","format-standard","hentry","category-upsc-cds-1","tag-1105","tag-economic-development","tag-money-banking","no-featured-image-padding"],"yoast_head":"\nWhich of the following policies help to raise interest rate unambiguou<\/title>\n<meta name=\"description\" content=\"The correct answer is D) Contractionary monetary policy and expansionary fiscal policy. Contractionary monetary policy (e.g., raising interest rates, selling bonds) directly increases interest rates. Higher interest rates attract foreign capital seeking higher returns, increasing demand for the domestic currency and leading to its appreciation. Expansionary fiscal policy (e.g., increased government spending, lower taxes) increases aggregate demand and can also lead to higher interest rates due to increased government borrowing (crowding out) and increased economic activity, further reinforcing the upward pressure on interest rates and potentially the currency. This combination is known to lead to higher interest rates and currency appreciation in open economies with capital mobility. - Monetary policy directly influences interest rates and money supply. Contractionary monetary policy raises interest rates. - Fiscal policy influences aggregate demand through government spending and taxation. Expansionary fiscal policy increases demand. - In open economies with capital mobility, higher domestic interest rates relative to foreign rates attract capital inflows, increasing demand for the domestic currency and causing appreciation. - Contractionary monetary policy is the most unambiguous tool to raise interest rates. Combined with expansionary fiscal policy, which also puts upward pressure on rates (via crowding out and demand), it creates a strong force for higher interest rates and currency appreciation.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/exam.pscnotes.com\/mcq\/which-of-the-following-policies-help-to-raise-interest-rate-unambiguou\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Which of the following policies help to raise interest rate unambiguou\" \/>\n<meta property=\"og:description\" content=\"The correct answer is D) Contractionary monetary policy and expansionary fiscal policy. Contractionary monetary policy (e.g., raising interest rates, selling bonds) directly increases interest rates. Higher interest rates attract foreign capital seeking higher returns, increasing demand for the domestic currency and leading to its appreciation. Expansionary fiscal policy (e.g., increased government spending, lower taxes) increases aggregate demand and can also lead to higher interest rates due to increased government borrowing (crowding out) and increased economic activity, further reinforcing the upward pressure on interest rates and potentially the currency. This combination is known to lead to higher interest rates and currency appreciation in open economies with capital mobility. - Monetary policy directly influences interest rates and money supply. Contractionary monetary policy raises interest rates. - Fiscal policy influences aggregate demand through government spending and taxation. Expansionary fiscal policy increases demand. - In open economies with capital mobility, higher domestic interest rates relative to foreign rates attract capital inflows, increasing demand for the domestic currency and causing appreciation. - Contractionary monetary policy is the most unambiguous tool to raise interest rates. Combined with expansionary fiscal policy, which also puts upward pressure on rates (via crowding out and demand), it creates a strong force for higher interest rates and currency appreciation.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/exam.pscnotes.com\/mcq\/which-of-the-following-policies-help-to-raise-interest-rate-unambiguou\/\" \/>\n<meta property=\"og:site_name\" content=\"MCQ and Quiz for Exams\" \/>\n<meta property=\"article:published_time\" content=\"2025-06-01T03:13:13+00:00\" \/>\n<meta name=\"author\" content=\"rawan239\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"rawan239\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"Which of the following policies help to raise interest rate unambiguou","description":"The correct answer is D) Contractionary monetary policy and expansionary fiscal policy. 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Expansionary fiscal policy increases demand. - In open economies with capital mobility, higher domestic interest rates relative to foreign rates attract capital inflows, increasing demand for the domestic currency and causing appreciation. - Contractionary monetary policy is the most unambiguous tool to raise interest rates. 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Expansionary fiscal policy increases demand. - In open economies with capital mobility, higher domestic interest rates relative to foreign rates attract capital inflows, increasing demand for the domestic currency and causing appreciation. - Contractionary monetary policy is the most unambiguous tool to raise interest rates. 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