When international capital controls are absent, central banks establish ________ to shape the right motivations for speculators?
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Answer: C. interest rates
Explanation
Central banks adjust interest rates to influence the attractiveness of holding a national currency. Higher interest rates provide better returns for investors, which can discourage speculative capital outflows. This tool helps maintain currency stability when international capital controls are not currently present. Capital controls are government-imposed limits on the flow of foreign capital into or out. Speculators bet on currency movements to make profits, which can destabilize the exchange rate. Monetary policy is the primary tool for managing the domestic economy and currency value.
The Federal Reserve adjusts rates to manage the value of the dollar against others. Emerging markets often raise rates to defend their currency during periods of high volatility. This strategy is a cornerstone of modern central banking in open global financial markets. Money supply targets are less effective for managing daily speculative flows in modern markets. Income policy involves direct wage and price controls, which are rarely used for speculation. Inflation targets are long-term goals and do not address immediate short-term speculative currency pressures.
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