Interest rate differentials can cause rapid fluctuations in short-run exchange rates.

Question

Quizplus · Accepted Answer

Interest rate differentials play a significant role in determining exchange rates, and changes in these differentials can result in rapid fluctuations in short-run exchange rates. This is because higher interest rates tend to attract foreign investors, increasing demand for the currency and pushing up its value in the short-term, while lower interest rates tend to have the opposite effect, decreasing demand for the currency and pushing down its value.

Interest Rate Differentials Can Cause Rapid Fluctuations in Short-Run Exchange