Answer to Question #195047 in Finance for Peter Masih

Question

Describe how the prevailing interest rates in a country affect its exchange rates with the 

currency of its major trading partner

Answer 1

1. When the rates are low, the commercial banks and companies take out loans on lower interest rates. This allows selling of goods at a cheap price, the Central Bank is the forced to print more money and inflation accelerates the currency to be cheaper.
2. When rates are high, loans become more expensive while the good in the markets are also lower in competitiveness. The demand of loans fall, inflation slows down and the currency become more expensive.