If the UK and Japan engage in much financial flows but little trade, ____ directly influences their exchange rate the most. If the UK and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most.

Question

Quizplus · Accepted Answer

Interest rate differentials primarily influence exchange rates when financial flows are significant, as seen between the UK and Japan. Conversely, inflation and income differentials are more influential when trade is the primary interaction, as with the UK and Switzerland.

If the UK and Japan Engage in Much Financial Flows