Country X frequently engages in trade flows with the United States (such as imports and exports). Country Y frequently engages in capital flows with the United States (such as financial investments). Everything else held constant, an increase in U.S. inflation would affect the exchange rate of Country Y's currency more than the exchange rate of Country X's currency.

Question

Quizplus · Accepted Answer

Inflation primarily affects trade flows by altering the relative prices of goods and services, which would more directly impact the exchange rate of Country X's currency due to its frequent engagement in imports and exports with the United States. Country Y, being more involved in capital flows, would be less directly affected by changes in inflation in terms of immediate exchange rate adjustments.

Country X Frequently Engages in Trade Flows with the United