The view that inflation in a country can lead to depreciation of the country's currency which in turn can cause further inflation is known as
A) the vicious circle hypothesis.
B) the autonomous spending multiplier concept.
C) the purchasing power parity problem.
D) the exchange risk hypothesis.

Question

Quizplus · Accepted Answer

The view that inflation can lead to currency depreciation, which further fuels inflation, is called the vicious circle hypothesis. This occurs because as prices increase, imports become more expensive, leading to a higher demand for domestically produced goods, which can further drive up prices. As the currency depreciates, it becomes less valuable relative to other currencies, making imports even more expensive and exacerbating the inflationary pressure.

The View That Inflation in a Country Can Lead to Depreciation