Interest Rate Parity Several factors affect the exchange rate of a currency with

Question

Interest Rate Parity

Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply. If the demand for a currency increases, the currency's value will increase relative to other currencies. When a government limits imports and restricts foreign exchange transactions, its currency's value tends to increase relative to other currencies. An increase in inflation tends to increase the currency's value with respect to other currencies with lower inflation. If a government intends to prevent its currency's value from falling relative to other currencies, it will purchase its currency from sellers in the market.

Explanation / Answer

Qs. 1 on Factors, option 1 & 4 are true. Option 1 states "If the demand for the currency invcreases, the currency's value will increase relative to other currencies" and Option 4 states "If a government intends to prevent its currency's value from falling rel;ative to other currencies, it will purchase its currency from sellers in the market".

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