Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies. Consider the following statement: Countries with lower inflation rates will have lower interest rates. Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid. O The statement is valid, because the nominal interest rate is the sum of the real interest rate plus inflation, so lower inflation rates would result in lower interest rates O The statement is invalid, because the nominal interest rate is independent of the inflation rate. The currency of a country with a higher inflation rate than the U.S. inflation rate will over time against the dollar.
Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies. Consider the following statement: Countries with lower inflation rates will have lower interest rates. Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid. O The statement is valid, because the nominal interest rate is the sum of the real interest rate plus inflation, so lower inflation rates would result in lower interest rates O The statement is invalid, because the nominal interest rate is independent of the inflation rate. The currency of a country with a higher inflation rate than the U.S. inflation rate will over time against the dollar.
Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates
Section: Chapter Questions
Problem 43QA
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Transcribed Image Text:Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of
multinational companies.
Consider the following statement:
Countries with lower inflation rates will have lower interest rates.
Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid
or invalid.
O The statement is valid, because the nominal interest rate is the sum of the real interest rate plus inflation, so lower inflation rates would
result in lower interest rates
O The statement is invalid, because the nominal interest rate is independent of the inflation rate.
The currency of a country with a higher inflation rate than the U.S. inflation rate will
over time against the dollar.
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