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9) Now i understand the connection between Inflation and Exchange rates. (purchasing power parity)
My question is : it says governments can change Exchange Rates. How ?
10) Whats the correlation and connection between Interest rates and Inflation? How can interest rates affect Inflation rates? If people are spending more, and Demand increases ( as a result of low interest rates) producers put the prices higher – so it increases inflation??Governments can change exchange rates – they can set whatever value they want. However these days almost all countries (certainly as far as the exam is concerned) let the market decide what the exchange rate will be.
In theory, higher interest rates will mean higher inflation rates. In real life (in the long term) countries with higher interest rates do have higher inflation.
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