When inflation increases over the long run (several years)

Question

Quizplus · Accepted Answer

When inflation increases over the long run, interest rates typically move up with it. This is because lenders will demand higher interest rates to compensate for the decrease in purchasing power of the money they will be repaid with. Higher interest rates can also help slow down inflation by making it more expensive for consumers and businesses to borrow money and spend.

Answer: D
 When inflation increases over the long run, the currency of a country with comparatively lower inflation may appreciate against the currency of a country with higher inflation. This is because the higher inflation rate is eroding the value of the currency, making it less attractive to investors and causing its value to decline in the foreign exchange market. Conversely, the currency of a country with relatively lower inflation may become more attractive to investors, driving up its value relative to other currencies. However, other factors besides inflation can also influence exchange rates, so this relationship is not guaranteed.

Therefore, both choices B and D are correct as they both explain the impacts of inflation on interest rates and currency values.

When Inflation Increases Over the Long Run (Several Years)