Question

If Malaysia experiences a decline in economic growth (and experiences a decline in inflation and nominal interest rates as a result), what would the probable impact on its currency be when it is compared with the U.S. dollar, and why?

Answer 1

Case Specifics:-

Supposing that Malaysia experiences a decline in economic growth resulting in slowness and sluggish demand for its products and services. This would mean, that the demand for Malaysian currency which is locally known as the Ringgit would decline in both the domestic market and the international market.

When demand for a product declines, the prices of the products are lowered. This results in devaluation of the domestic currency. As a result, one unit of Malaysian currency would be able to buy lesser amount of goods and services in the international market which it previously did. This phenomenon is also known as deflation of currency.

When compared to the US Dollar, if the currency exchange rates reduce, they would indicate that imports will become more expensive for Malaysia. A resultant of this factor would be that buying goods from the United States would become more expensive.

Reasons:-

Sluggish demand within the country and outside the country, results in rapid decline in the demand for the currency. The resultant is that the value of the currency declines when compared with other currencies.

Further, any country engages in trade with others to make sure some items which it cannot produce can be imported. As such, Malaysia does its fair share of trade with the world outside. As a result of the ongoing sluggish demand in the country, the country would face difficulty in imports and the value of dollar would increase when compared to the currency respectively.

Please feel free to ask your doubts in the comments section if any.