Which of the following would lead to a depreciation of the currency?
A) low inflation
B) high interest rates
C) high inflation
D) low economic growth
E) none of the above

Question

Quizplus · Accepted Answer

High inflation in a country tends to lead to a depreciation of its currency. When inflation is high, the value of the currency erodes, which means that it can buy fewer goods and services over time. This decrease in purchasing power can make the currency less attractive to foreign investors, as the returns on their investments may not keep up with the inflation rate.
As a result, demand for the currency may decrease on the foreign exchange markets, leading to a fall in its value relative to other currencies. Additionally, to combat high inflation, a country's central bank may decide to increase interest rates, which could initially attract foreign investment due to higher returns, but over time, if inflation is not controlled, the currency may still depreciate.
The other options listed typically have different effects on a currency's value:
a. Low inflation is generally seen as a positive factor for a currency's value, as it helps maintain purchasing power.
b. High interest rates can attract foreign investment, leading to an appreciation of the currency, as investors seek higher returns.
d. Low economic growth can have a mixed impact on a currency. While it might lead to a depreciation due to reduced investment and confidence, the effect is not as direct as high inflation.
e. None of the above is incorrect because high inflation is a factor that can lead to currency depreciation.

Which of the Following Would Lead to a Depreciation of the Currency