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

A

appreciate.

B

depreciate.

C

maintain its value.

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 2 years ago

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