What happens over time to the currencies of countries with higher inflation rates than that of the United States?

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What happens over time to the currencies of countries with higher inflation rates than that of the United States?

What happens over time to the currencies of countries with higher inflation rates than that of the United States? To those with lower inflation rates?

Answer & Explanation (1)

Explanation

Over the long run, countries that have a relatively higher inflation rate than the US will see a depreciation of their domestic currency against the US dollar. This is because countries with high inflation will have a high money supply, and domestic interest rates will rise and so domestic currency will depreciate. On the other hand, countries that have a relatively lower inflation rate than the US will see an appreciation in their domestic currency against the US dollar. This is because countries with low inflation will have a low money supply, and domestic interest rates will decrease or will be lower than the US rates and so domestic currency will appreciate.

Sample Response

Countries with relatively high inflation: domestic currency will depreciate.
 
Countries with relatively low inflation: domestic currency will appreciate.

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