Question

What is the relationship of the real value of currency to real interest rate, inflation and output gap, and risk premium?

Answer 1

In the medium run, inflation rates have an impact on exchange rate markets. Countries with higher inflation tend to have a lower demand for their currency, leading to currency depreciation. Over long periods of time, exchange rates tend to adjust towards the purchasing power parity (PPP) rate.

Step-by-step explanation:

In the medium run, inflation rates have an impact on exchange rate markets. Countries with higher inflation tend to have a lower demand for their currency, leading to currency depreciation. Over long periods of time, exchange rates tend to adjust towards the purchasing power parity (PPP) rate.