ECONOMICS
TRADE EXCHANGE AND INTERDEPENDENCE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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increased demand for country A’s currency
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increase supply of country B’s currency
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a decrease in the supply of country A’s currency
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depreciation of country A currency
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Detailed explanation-1: -Inflation occurs when the prices of commodities rise beyond a certain degree. This occurs when a currency tends to lose its value. Consequently, there is a rise in prices. Over a period of time, an increase in the prices of commodities takes place because currency gets devalued.
Detailed explanation-2: -When inflation is higher, this tends to have a depressing affect on the value of a country’s currency. This is because increased inflation reduces the currency’s buying power, which weakens it against other currencies. The impact of increasing inflation on currency conversion rates is usually downwards.
Detailed explanation-3: -Economic fundamentals, interest rate differentials, political instability, or risk aversion can cause currency depreciation. Orderly currency depreciation can increase a country’s export activity as its products and services become cheaper to buy.