Question

Describe the relation between interest rates, inflation rates, and exchange rates. Explain how low inflation can affect revenues and profits of exporting companies

Answer 1

The nominal interest rate is dependent on the real interest rate and inflation rate, if the inflation rate is high then the nominal interest rate will also be high, higher inflation is directly related to the higher interest rate. Inflation odes effect the purchasing power of the currency, if there is high inflation in the economy so the currency will lose its value and the currency exchange rate will depreciate vis-à-vis other countries so higher inflation will lead to depreciation in the value of currency. If the inflation is low or mild inflation that is actually said to be good for the exporter because the small increase in cost can be passed on by the exporter to customer and since the inflation is low so it will also not hurt the demand much. When there is high inflation then the input cost arises so the cost also increases sharply and the demand might be negatively effected but mild inflation does not impact the demand that and it actually increases the profits and revenue of the exporting companies.