If one country, with floating exchange rates, has higher inflation than its competitors we would expect its exchange rate to ?
Correct answer: B. depreciate
- A. appreciate
- B. depreciate
- C. revalue
- D. be in short supply
Explanation
Higher domestic inflation makes the country’s goods relatively expensive, reducing demand for its currency and increasing demand for foreign currency. Under floating rates, this causes the domestic currency to depreciate rather than be revalued, which applies to fixed-rate systems.
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About Macroeconomics
The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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