In a flexible exchange-rate system, the exchange rate between two countries is primarily determined by supply and demand for the currencies in the foreign exchange market. Factors that influence this supply and demand can include economic indicators, interest rates, inflation rates, political stability, and overall market sentiment.
While inflation and interest rates can affect supply and demand, they do not set the exchange rate directly. Instead, they influence the behavior of investors and traders in the foreign exchange market, which in turn affects supply and demand dynamics.
So, the best answer to your question is supply and demand.
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