Assume that the inflation rate becomes much higher in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound.
A) upward; downward
B) upward; upward
C) downward; upward
D) downward; downward

Question

Assume that the inflation rate becomes much higher in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound.​
A) ​upward; downward
B) ​upward; upward
C) ​downward; upward
D) ​downward; downward

Quizplus · Accepted Answer

When the inflation rate is higher in a country, its currency tends to depreciate in value. Therefore, the value of the British pound will experience downward pressure in this scenario. However, when interest rates rise in a country, its currency tends to appreciate in value. Therefore, the change in interest rates will place upward pressure on the value of the British pound. Combined, the two factors will result in the overall pressure on the value of the British pound being upwards (although the impact of inflation will be stronger).

Assume That the Inflation Rate Becomes Much Higher in the United