On Friday September 20, 2013, India’s Central Bank, the Reserve Bank of India (RBI), moved to raise interest rates. Assume the impact was an increase in the real interest rate on India’s securities denominated in the Indian rupee (INR). Earlier that week, the US Federal Reserve announced it would continue its policy of maintaining low US interest rates.
- The US and India are trading partners. Given the information and assumption above, what is the net result on India’s relative real interest rate (compared to the US interest rate)?
Choose one: INCREASE DECREASE NO CHANGE
- Draw a graph depicting the market for foreign exchange between the U.S. and India, which depicts specifically the market for the Indian Rupee. You must label each axis correctly, each curve correctly, and the initial equilibrium exchange rate correctly.
- Given your answer above, explain whether, all else equal, the demand for the IRP increases, decreases, or remains unchanged. Explain the reason for your answer and depict it on your graph above.
- Given your answer above, explain whether, all else equal, the supply of the IRP increases, decreases, or remains unchanged. Explain the reason for your answer and depict it on your graph above.
- What happens to the value of the rupee against the dollar? Depict the new equilibrium on the graph above.