Under the Modern Asset Theory for FX rates, if a country has significant inflation in its nominal prices for goods and services relative to other countries, which of the following statements is true under exchange rate theory for the country's currency exchange rate relative to the currency of other countries?

Question

Quizplus · Accepted Answer

According to the Modern Asset Theory, higher inflation in a country will lead to a decline in the demand for its currency as investors would prefer to hold currencies of countries with relatively lower inflation rates. This will result in a fall in the exchange rate of the country's currency relative to the currency of other countries. Therefore, option A is the correct answer. Option B is incorrect as it is opposite to the theory. Option C is also incorrect as inflation rates are considered relevant in exchange rate determination under the Modern Asset Theory. Option D is incorrect as only option A is correct.

Under the Modern Asset Theory for FX Rates, If a Country