Country X frequently engages in trade flows with the UK (such as imports and exports). Country Y frequently engages in capital flows with the UK (such as financial investments). Everything else held constant, an increase in UK 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 UK interest rates would likely affect Country Y's currency more because capital flows are more sensitive to interest rate changes than trade flows.

Country X Frequently Engages in Trade Flows with the UK