Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____ pressure on the value of the British pound.
A) upward; downward
B) upward; upward
C) downward; upward
D) downward; downward

Question

Quizplus · Accepted Answer

If the inflation rate in the U.K. becomes higher relative to the U.S., then the purchasing power of the British pound decreases. This will place downward pressure on the value of the British pound. 
If interest rates in the U.K. begin to rise relative to interest rates in the U.S., then investors may be attracted to higher returns in the U.K. This will place upward pressure on the value of the British pound. Therefore, the best choice is C where inflation rate changes will place downward pressure and interest rate changes will place upward pressure.

Assume That the Inflation Rate Becomes Much Higher in the U.K