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. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

Question

Quizplus · Accepted Answer

An increase in U.S. interest rates would primarily affect capital flows, not trade flows. Therefore, Country Y's currency would be affected more due to its frequent engagement in capital flows with the United States.

Country X Frequently Engages in Trade Flows with the United