Over the long run, a country with a higher inflation rate than other countries will see...

Over the long run, a country with a higher inflation rate than other countries will see its currency

appreciate.

depreciate.

maintain its value.

Solutions

Expert Solution

Let's take an example of a country and try to understand how a high level of inflation impact exchange rates.

Let's take an example of the US. Suppose there is high inflation in the US. High inflation in the US would mean goods increase in price quicker than the rest of the world. Thus, goods in the US would become less competitive. Demand for US exports will fall and therefore there will be less demand for the US dollar as well.

Also, US consumers would find it attractive to buy from the rest of the world. Thus, they will supply the US dollar to be able to buy some other currencies. As a result of the increase in the supply of the US dollar in the international market, the value of the US dollar will go down.

Thus, an increase in US dollar supply and a fall in demand would lead to a lower value of the US dollar against any other currency.

Thus, in the long run, a country with a higher inflation rate than other countries will see its currency depreciate.

Option B is the correct answer.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

1- in the long run, if inflation is higher in India than in the U.S.A., one...

1- in the long run, if inflation is higher in India than in the U.S.A., one would expect a. the dollar to depreciate relative to the rupee b. the rupee to depreciate relative to the dollar c. the rupee to appreciate relative to the dollar d. two of the above are correct 2- if interest rates rise in Europe (with no change in expected inflation), a. the dollar will appreciate relative to the euro b. the dollar will depreciate relative...

A country has a lower inflation rate than all other countries. It has more rapid economic...

A country has a lower inflation rate than all other countries. It has more rapid economic growth. The central bank does not intervene in the foreign exchange market. What can you say (and why) about: The exchange rate? The current account balance? The expected exchange rate? The interest rate differential? Interest rate parity? Purchasing power parity?

What determines the inflation rate in the long run? How might inflation in the long run...

What determines the inflation rate in the long run? How might inflation in the long run be related to fiscal policy? What is seigniorage?

If a country has persistently high inflation over the long-run, say 10% pa, explain how this...

If a country has persistently high inflation over the long-run, say 10% pa, explain how this will affect the value of the nominal exchange rate over the long-run. Assume that inflation elsewhere is 2% per annum.

Briefly explain why the unemployment rate is, on average, higher in many other developed countries than...

Briefly explain why the unemployment rate is, on average, higher in many other developed countries than the United States and given examples of such higher averages. In your explanation, touch on at least 2 labor market factors.

A) Suppose Inflation is higher than the Fed's target rate. To reduce Inflation, the Fed should...

A) Suppose Inflation is higher than the Fed's target rate. To reduce Inflation, the Fed should .................... government bonds. This will in turn ................... money supply and .................. interest rates. In essence, what kind of Monitory Policy is the Fed Running here ? B) If the Fed changes interest rate from 0.25% to 0.75% while the European central bank keeps the interest rate unchanged at 0.25% what would be the impact on : U.S. Capital Inflows (increases or Decreases)? U.S....

Assuming that there is no long-run relationship between the inflation rate and unemployment. If this is...

Assuming that there is no long-run relationship between the inflation rate and unemployment. If this is true, then why is it that people pay such close attention to every move made by the Fed?

Mexico tends to have much higher inflation rate than the United States and also much higher...

Mexico tends to have much higher inflation rate than the United States and also much higher interest rate than the United States. Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies of industrialized countries from a US perspective; it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. The bid/ask spread tends to be...

A medical researcher wishes to see whether the pulse rate of smokers are higher than the...

A medical researcher wishes to see whether the pulse rate of smokers are higher than the pulse rates of non-smokers. Samples of 100 smokers and 100 nonsmokers are selected. The results are shown below. Can the researcher conclude at an alpha = 0.05, that smokers have higher pulse rates than nonsmokers? (20 points) SmokersNon. Smokers Mean= 90 b. Mean = 88 Standard Deviation = 5. Standard Deviation = 6

The personal savings rate in Asian countries is often much higher than in Europe or the...

The personal savings rate in Asian countries is often much higher than in Europe or the United States. For instance, the personal savings rate in the United States is around 5 percent, while the same rate in China is around 30 percent. What impact will this have on the growth of capital stock in the United States versus China? In the above question, suppose that savers in China decide to put a significant portion of their savings into financial instruments...

Subjects