Question

Question 8 Which of the following statement is true?

a. A higher inflation in Thailand than that in Japan is a pressure to appreciate the Baht against Yen.

b. The long-lasted low interest rate has motivated the decrease in Yen-carry foreign investments.

c. An increase in interest rate in Indonesia does not always increase multinational companies’ investment to the country.

d. Multinational companies are hesitant to invest in emerging markets because they expect appreciation of the emerging markets’ currencies.

Answer 1

Answer-Option a. is true.

Explanation-As we know, appreciation is an increase in the value of one currency as compared to the value of the currency of a foreign country. Today most of the economies of the world are interconnected and depend on each other through international trade. Countries usually import and export local products and foreign goods. As countries have different currencies, like the Baht in Thailand and Yen in Japan, so they need a 'currency exchange rate' to compare them. When the value of a currency appreciates, imports becomes cheaper and exports becomes costlier as the purchasing power of the domestic country increases. Inflation refers to the increase in general price level of goods and services. It has direct impact on the exchange rate as infaltion affects the imports and export prices of goods and services.

Currency appreciation in a country usually reduces inflation. When the currency is appeciated , the imports become cheaper and as a result, the lower prices lead to lower inflation. It makes imports more attractive to the domestic country people and leads to the demand for local products to fall. When demand falls, price falls and hence inflation decreases. But too much fall in demand is also harmful for the local inustries.