In the absence of international capital controls, central banks set ________ to provide the correct incentive for speculators?
Correct answer: C. interest rates
- A. money supply targets
- B. income policy
- C. interest rates
- D. inflation targets
Explanation
With free international capital movement, central banks use interest rates to influence capital flows and provide incentives for speculators. Interest-rate differences attract funds toward higher-return currencies, subject to exchange-rate expectations.
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