If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar.
A) upward
B) downward
C) either upward or downward (depending on the degree of the increase in Australian inflation)
D) none of the above; there will be no impact

Question

Quizplus · Accepted Answer

When inflation increases in Australia, the value of the Australian dollar is expected to decrease with respect to the U.S. dollar, as the increased inflation erodes the purchasing power of the currency. This increases the likelihood of Australian consumers and investors purchasing goods and services from other countries, leading to a decrease in demand for the Australian dollar and, consequently, a lower exchange rate. Therefore, an increase in Australian inflation would place downward pressure on the value of the Australian dollar relative to the U.S. dollar.

If Inflation Increases Substantially in Australia While U