Question

evaluate the effect of the changes in inflation rates is likely to have on the relative value of two currencies.

Answer 1

Answer-

The relative value of two currencies due to the effect of changes in inflation will be opposite.

The Currency with higher inflation will depreciate relative to the Currency with lower inflation by the difference in percent inflation rate. As the inflation increases the currency depreciates relative to other curerencies with lower inflation.  

For illustration

Let the relative Currency between US $ / Pound be = $ 1.34 / Pound. ie. 1 $ US = 1.34 Pound . Countries are US ($) and UK (Pound)
Let the inflation rate in US be 3 % and the Inflation rate in UK be 4 %. The higher inflation in UK leads the currency depreciation of UK Pound with respect to $ US.   

Depreciation = US inflation rate - UK inflation rate = 3 % - 4 % = - 1 %

Therefore the Pound will depreciate relative to $ by 1%

The new exchange rate = $ 1.34 x 0.99 / Pound = $ 1.3266 / Pound [ 1 % depreiation = (1 - 0.01) = 0.99 )

Therefore the Pound has depreciated as the number of dollars ($)  that one needs to buy one Pound is less and has decreased from $ 1.34 to $ 1.3266.