To combat rising inflationary pressures, a central bank decides to increase its main policy interest rate. Which of the following is the most likely transmission channel and outcome of this policy decision?
An increase in commercial bank lending as banks seek to capitalise on higher interest margins
An appreciation of the domestic currency, resulting in an improvement in the balance of trade in goods and services
An increase in hot money inflows, causing the domestic currency to appreciate and reducing the price of imported raw materials
A reduction in the yield on government bonds, lowering the cost of borrowing for the public sector
