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Question ZPS Co explain briefly the relationship between 1) exchange rates and interest rates 2) exchange rates and inflation rates
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Inflation rates in the two countries are one factor that effects exchange rates. It is purchasing power parity (which is explained in the notes on this website) and there is a formula for it on the formula sheet.
In theory, interest rates and inflation rates are related (and move with each other) and so the same logic as purchasing power parity also applies to interest rates.
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