[pia ach]

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.

[HappyDayss]

Answer is B because

for example,

Lets say 100 FC = 1 US Dollar, but due to inflation, the REAL exchange rate is actually 20 FC = 1 US Dollar.

If you are only REALLY getting 20 FC, it has become less desirable because inflation weakens purchasing power of each unit of currency, and will result in a decrease in demand for Indian currency. Therefore, from your example, India products will NOT be cheaper. Your reasoning would only make sense if inflation only effected exchange rates and not price levels in India.

Done ^_^

[Whopper Warrior]

I can not truly explain the answer with #'s but you can still get the answer correct. We obviously agree answer A is wrong, leaving us with B, C, and D. Out of the three, C and D propose a positive correlation (increase=increase, decrease=decrease) while B is negative (increases=decrease). By odd man out we can reason B (if C was correct, so must D). As for the advanced behind the scenes working that is another story.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Author]

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