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    how do inflation rates, interest rates and exchange rates effect each other?
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    (Original post by winniethepotato)
    how do inflation rates, interest rates and exchange rates effect each other?
    Interest rates effect inflation as they effect consumer savings and consumption. Eg if interest rates go up, people save more due to gaining a higher return and consumer less. This shifts AD inwards. This makes us less internationally competitive, increasing Imports and reducing exports, which reduces the demand for the pound and increases demand for other currencies, therefore reducing the exchange rate. And obviously this would work vice versa.
 
 
 

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