Question

Assume that the inflation rate becomes much lower in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to decline relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound

Answer 1

Answer:

This will place DOWNWARD pressure on the value of the British pound. Also, assume that U.K. interest rates begin to decline relative to U.S. interest rates. The change in interest rates will place UPWARD pressure on the value of the British pound

Explanation:

When high inflation occurs, the value of a currency falls, so it should depreciate against other currencies. High inflation means that a certain amount of money will buy less amount of goods than it used to in the past.

If the interest rates of a country start to rise, more investors will be willing to invest in that country just to earn higher returns (higher interest rates = higher returns). Since investors will increase their purchase of the currency, then that will appreciate the currency against other foreign currencies until the effect of the high interest rates is cancelled out.