Final answer:
Higher nominal interest rates can stabilize prices in the long run by dampening economic activity. All else equal, the nominal exchange rate is likely to appreciate with higher interest rates because of increased demand for the currency. A surge in economic growth could cause both interest rates and currency value to rise simultaneously.
Step-by-step explanation:
An increase in a country's nominal interest rate can affect the prices in the long run by potentially curbing inflation. This is because higher interest rates can decrease borrowing and spending, leading to a slow-down in economic activity. Over time, if the central bank raises interest rates to a level higher than inflation, it can stabilize prices in the economy.
All else being equal, the nominal exchange rate would be likely to appreciate as a result of an increase in nominal interest rates. This appreciation occurs because higher interest rates would increase the demand for the country's currency as investors seek higher returns, thus making the currency more valuable compared to others.
An example of an event that would cause a country's nominal interest rate to rise and its currency to also appreciate would be if the country is experiencing higher economic growth rates than its trading partners. This would result in increased demand for the country's currency due to increased investment opportunities, likely causing both the interest rates and the value of the currency to rise in a world with perfectly flexible prices.