Which of the following interactions will likely have the least effect on the dollar's value? Assume everything else is held constant.
A) A reduction in U.S. inflation accompanied by an increase in real U.S. interest rates
B) A reduction in U.S. inflation accompanied by an increase in nominal U.S. interest rates
C) An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates
D) An increase in Singapore's inflation accompanied by an increase in real U.S. interest rates
E) An increase in Singapore's interest rates accompanied by an increase in U.S. inflation.

Question

Quizplus · Accepted Answer

An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates will have the least effect on the dollar's value because it does not change the real return on U.S. assets relative to other countries, which is a key determinant of exchange rates. The other options involve changes in real interest rates or inflation rates that could have significant effects on the dollar's value.

Which of the Following Interactions Will Likely Have the Least