Differences among nations in real economic growth rates, real interest rates, and inflation rates will each affect the exchange rates among their currencies.

Question

Quizplus · Accepted Answer

This statement is true. Differences in real economic growth rates, real interest rates, and inflation rates can affect the supply and demand of a country's currency, therefore impacting its exchange rate with other currencies. For example, a country with higher real economic growth rates and higher real interest rates may attract more foreign investment, increasing demand for its currency and causing its exchange rate to appreciate. On the other hand, a country with high inflation rates may cause its currency to depreciate as investors may shy away from investing there.

Differences Among Nations in Real Economic Growth Rates, Real Interest