During a global economic slowdown, central banks across most developed nations reduce their policy interest rates by an average of 2.5%. However, to combat domestic cost-push inflation, the central bank of Country Z maintains its interest rates at their existing level.
Holding all other factors constant, what is the most likely impact on Country Z?
Hot money will flow out of Country Z, causing its exchange rate to depreciate.
Hot money will flow into Country Z, causing its exchange rate to appreciate.
Hot money will flow out of Country Z, causing its exchange rate to appreciate.
Hot money will flow into Country Z, causing its exchange rate to depreciate.