If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:
A) an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
B) an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
C) an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
D) an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

Question

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:​
A) ​an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
B) ​an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
C) ​an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
D) ​an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

Quizplus · Accepted Answer

When inflation increases in New Zealand while remaining stable in the U.S., the value of the New Zealand dollar (NZ$) would decrease relative to the U.S. dollar. This would lead to a decrease in demand for NZ$ (as it becomes less attractive to hold) and an increase in supply (as people and businesses are more inclined to exchange NZ$ for more stable currencies), hence an inward shift in the demand schedule and an outward shift in the supply schedule for NZ$.

If Inflation in New Zealand Suddenly Increased While U