ECONOMICS
TRADE EXCHANGE AND INTERDEPENDENCE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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How does inflation rate affect currency value/exchange rate?
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Higher inflation leads to depreciating currency & vice versa
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Increasing inflation leads to more favourable exchange rates
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Higher inflation leads to currency appreciation
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Lower inflation leads to more favourable exchange rate
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Explanation:
Detailed explanation-1: -Macroeconomic theory says that the difference between inflation rates in two countries explains, to a large extent, the movement in their exchange rate. Thus, a country (say India) with a higher inflation rate compared to another (say the US) will see its currency rupee depreciate against the latter’s dollar.
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