Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. 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 U.S. interest rates would affect capital flows more than trade flows. Country Y, which engages in capital flows, would therefore experience a greater impact on their currency exchange rate than Country X, which engages in trade flows.

Country X Frequently Engages in Trade Flows with the U