Which of the following is likely to increase the value of a country's currency?
a.
the country's imports are higher than its exports.
b.
the country has high inflation.
c.
the country has a lot of debt.
d.
the country has a high interest rate.

The answer is D: The country has a high interest rate.

Think of a currency as something whose price is set by demand and supply. Printing money, for example, increases the supply and lowers the exchange rate. Selling more exports and raising interest rates increases the demand and raises the price and attract what I’d call hot money flows. Higher interest rates attract foreign capital and offer lenders a higher return as compared to other countries. As a result, this causes an exchange rate to rise.

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