Q6 CH17

6. Inflation, interest rates, and exchange rates 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 ittvalid. The statement is invalid, because the neminal interest rate is independent of the inflation rate. The statement is vald, 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. If comparies borrow from countries with low interest rates, the potential gains from the interest savings will likely be from currency apgreciation. 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. The statement is invalid, because the nominal interest rate is independent of the inflation rate, 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. If companies borrow from countries with low interest rates, the potential gains from the interest savings will likely be from currency appreciation. by the losses The currency of a country with a lower inflation rate than the U.S. inflation rate will over time against the dollar