Assume that the level of capital flows between the U.S. and the country of Krendo is...

Assume that the level of capital flows between the U.S. and the country of Krendo is negligible (close to zero) and will continue to be negligible. There is a substantial amount of trade between the U.S. and the country of Krendo and no capital flows. Thus, the inflation effect will be _____ than the interest rate effect in influencing the exchanger rate of Krendo against U.S. dollar.

Expert Solution

The inflation effect will be lower than the interest rate effect

Lower interest rates boosts trade because people in the economy gets money at lower interest rate, so they will start buying more.

Inflation rate affects the cashflows in and out of the economy.

Here, only trade is happening between the two countries, hence inflation effect will be lower than the interest rrae effect.

jeff jeffy answered 2 years ago

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