Can someone please explain to me this becker question.
In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?
a. Inflation is irrelevant to currency demand.
b. As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign
currency falls.
c. As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign
currency rncreases.
d. As inflation associated with a foreign economy decreases in relation to a domestic economy, demand for the foreign
currency falls.
the answer is B.
My reasoning is if say example there increased Inflation in India( Foreign economy) compared to US (Domestic economy) and the INR (Foreign currency) has become weaker compared to US Dollar. So more INR with lesser $ spent, now we can purchase more foreign products as it is cheaper for us , thus more demand for Indian products and thus increase the demand for foreign currency.
However becker mentions inflation weakens the foreign currency in relation to the domestic currency and makes foreign products more expensive and reduces demand. Reduced demand for a foreign import will reduce the demand for its currency.
Can somebody please explain this concept, am really confused.
Finally done!!! Experience-pending. Ethics- Pending.
Reg 78 / 73/82.
Aud 74/89.
BEC 72 /78.
FAR 74/ 73/ 82.
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