Question

The exchange rate differential between the currencies of two countries is explained by:

• A. Fiscal deficit differential
• B. GDP growth rate differential
• C. Liquidity differential
• D. Interest-inflation rate differential

Hint:

Interest-inflation differential = key driver of currency value fluctuations.

Answer 1

The Correct Option is D

Step 1: Learn how exchange rates are determined.
- Key determinants: interest rates, inflation differences, and purchasing power parity.
Step 2: Summarize.
- Option 4 (Interest-Inflation rate differential) is the primary driver of exchange rate variations.