The demand for domestic assets will decrease if there is a decrease in foreign interest rates. The domestic currency will increase if there is a decrease in the foreign interest rate.
A reduction in the domestic GDP may be seen when domestic interest rates rise which attracts foreign investment. Interest rates are increased when liquidity in the markets needs to be reduced.
With high foreign interest rates, money is removed from the system, and demand for domestic assets decreases, and currency increases. The Government decides the factors which will affect the monetary policy of a country, and thereby the increase or decrease in the rates of interest. The economic goals and plans of a country are important and have to be kept in mind when deciding on interest rates.
Interest rates have a huge impact on the economy and the demand-supply equation in a country. Inflation can play a big dampener on the growth of the country if interest rates are not moderated accordingly.
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