Which of the following is most important in explaining exchange rate fluctuations in the short run?

Question

Quizplus · Accepted Answer

Interest rates are often the most important factor in explaining short-run exchange rate fluctuations. This is because interest rate differentials between countries affect capital flows, which in turn impact the demand for and supply of currencies, leading to changes in exchange rates. Other factors such as relative price levels and productivity growth may also play a role, but they are often less significant in the short run. Preferences for domestic and foreign goods may have some impact on exchange rates in the long run, but not as much in the short run.

Which of the Following Is Most Important in Explaining Exchange