Answer to Question #195037 in Management for Kajal

Question

Describe the prevailing interest rates in a country affect its exchange rates with the currency of its major trading partner.

Answer 1

When interest rates are high, loans become costlier, and market goods become less competitive. Loan demand is decreasing, inflation is slowing, and the currency is getting more expensive as a result. If prices are big and powerful, commercial banks and businesses take out loans at lower interest rates, often even zero rates, allowing them to export commodities at a lower cost. Meanwhile, the Central Bank prints more dollars, causing inflation to escalate and the currency to depreciate.