A key factor affecting the expectation of changes in a country's exchange rate with another currency is the relative ________ of the two countries.

Question

Quizplus · Accepted Answer

The expected inflation rate is a key factor affecting the expectation of changes in a country's exchange rate with another currency. If a country is expected to experience higher inflation than its trading partner, its currency will likely weaken in relation to the partner's currency. This is because inflation erodes the purchasing power of a currency and makes imports more expensive, resulting in a decrease in demand for that currency. Conversely, if a country has lower expected inflation, its currency is likely to appreciate.

A Key Factor Affecting the Expectation of Changes in a Country's