If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most.
A) interest rate differentials; interest rate differentials
B) inflation and interest rate differentials; interest rate differentials
C) income and interest rate differentials; inflation differentials
D) interest rate differentials; inflation and income differentials
E) inflation and income differentials; interest rate differentials

Question

Quizplus · Accepted Answer

Interest rate differentials influence exchange rates when financial flows are substantial, while inflation and income differentials influence exchange rates when trade is substantial.

If the US and Japan Engage in Substantial Financial Flows but Little