A country operates with a floating exchange rate and an independent central bank that can determine interest rates. Inflation is presently steady at the central bank’s target of 2%. If the central bank increases its inflation target from 2 % to 5 %, what is likely to occur to interest rates and to the exchange rate?
- Ainterest rates: fall; exchange rate: fall
- Binterest rates: fall; exchange rate: rise
- Cinterest rates: rise; exchange rate: fall
- Dinterest rates: rise; exchange rate: rise