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-The IFE suggests a relationship between interest rate differentials and exchange rates. Higher domestic interest rates tend to depreciate the domestic currency.

-Investors seek higher returns, potentially attracting foreign investment and driving the exchange rate down.

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Higher domestic inflation & interest rates compared to the foreign country. IFE predicts domestic currency depreciation. Imports become more expensive (less domestic currency buys less foreign goods). Exports become cheaper (foreign currency buys more domestic goods), potentially boosting exports.

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- Lower domestic inflation & interest rates compared to the foreign country.

-IFE predicts domestic currency appreciation.

- Imports become cheaper (more domestic currency buys more foreign goods).

-Exports become less competitive (foreign currency buys fewer domestic goods), potentially hurting exports.

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Similar Home & Foreign Inflation & Interest Rates

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Similar Home & Foreign Inflation & Interest Rates

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-Similar home and foreign inflation & interest rates.

-IFE predicts minimal change in exchange rates.

-Import and export prices remain relatively stable.

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-The IFE influences trade by impacting import and export competitiveness.

-Understanding the IFE helps businesses make informed decisions in the global market.

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-It's important to remember that the IFE is a theoretical framework, and real-world factors can influence exchange rates beyond interest rate differentials.

-Short-term fluctuations in interest rates might not always translate directly into exchange rate movements.

-Market efficiency and capital mobility also play a role in how strongly the IFE holds true.