Inflation differentials and the UK effective exchange rate 1 1. UK infition rote (CPI) minus the inflotion rote of euro countries and OECD countries. Approximotely 50 per cent of the UK's trode is with eurozone countries and 70 per cent with OECD countries. Source: adapted from wwwoecdiorg. (a) Explain why differences in the UK inflation rate and that of other countries might affect the volue of the pound. (b) To what extent is this relationship supported by the doto?.

1. Inflation differentials and the UK effective exchange rate 1 1. UK infition rote (CPI) minus the
inflotion rote of euro countries and OECD countries. Approximotely 50 per cent of the UK's
trode is with eurozone countries and 70 per cent with OECD countries. Source: adapted from
wwwoecdiorg. (a) Explain why differences in the UK inflation rate and that of other countries
might affect the volue of the pound. (b) To what extent is this relationship supported by the doto?