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 likely affect Country Y's currency more because capital flows are more sensitive to interest rate changes than trade flows. Higher U.S. interest rates would attract capital to the U.S., affecting Country Y's currency exchange rate more significantly.

Country X Frequently Engages in Trade Flows with the U