D Rationale: An increase in the exchange rate makes a country’s exports more expensive to
overseas buyers, and imports cheaper: it therefore has the opposite of the first three effects. The
lower cost of imports, however, is likely to reduce the rate of domestic inflation.
Pitfalls: The permutations of increases/decreases in interest rate can be confusing: ensure that
the logic makes sense to you!
Ways in: You could group options B and C together (increased cost = reduce demand): since
both cannot be the answer, and there is only one answer, neither of these options can be correct.
This gets you quite a long way towards the solution… So if you don’t know an answer, don’t
panic: logic can often help!