Which of the following pairs is correctly matched?

The correct answer is Option (3) → A rise in interest rates at home – appreciation of the domestic currency

Higher interest rates at home draw funds from abroad. Foreigners buy the home currency to invest, so its value rises: it appreciates.

Option (1) Interest rate differential – difference in price levels of two countries — Incorrect. It is the difference in interest rates between countries. Price levels belong to the PPP theory.

Option (2) Interest rate differential – a factor in exchange rates only in the long run — Incorrect. It matters in the short run.

Option (3) A rise in interest rates at home – appreciation of the domestic currency — Correct. More demand for the home currency raises its value.

Option (4) Higher interest rates abroad – appreciation of the domestic currency — Incorrect. Funds then move abroad, so the home currency depreciates.