What is a potential consequence of a country maintaining higher interest rates?

Maintaining higher interest rates can attract foreign capital inflow, making it the correct choice. When a country offers higher interest rates, it typically provides better returns on investments like bonds and savings accounts compared to other countries with lower rates. As a result, both foreign and domestic investors may look to capitalize on these higher returns, leading to an influx of foreign capital. This increased demand can strengthen the local currency and support the economy by providing more investment funding.

In contrast, other options are less likely to result from higher interest rates. A reduction in foreign exchange reserves typically occurs when a country engages in market interventions to stabilize its currency, rather than as a direct consequence of higher interest rates. A devaluation of the local currency would more likely be linked to lower interest rates or economic instability, and higher interest rates usually help to maintain or appreciate the value of the currency. Lastly, while higher interest rates can limit spending and potentially suppress inflation, they are generally associated with controlling inflation rather than directly increasing it.