Impact of Economy on Exchange Rate The country of Zars has large capital flows with the United States. It has no trade with the United States and will not have trade with the United States in the future. Its interest rate is 6 percent, the same as the U.S. interest rate. Its rate of inflation is 5 percent, the same as the U.S. inflation rate. You expect that the inflation rate in Zars will rise to 8 percent this coming year, whereas the U.S. inflation rate will remain at 5 percent. You expect that Zars’s interest rate will rise to 9 percent during the next year, whereas the U.S. interest rate will remain at 6 percent this year. Zars’s currency adjusts in response to market forces and is not subject to direct central bank intervention. Will Zars’s currency appreciate, depreciate, or remain unchanged against the dollar?
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