If the UK experiences inflation rates higher than in other European countries, the effect will be to:
A) decrease the UK demand for imports.
B) increase the demand for UK exports.
C) shift the UK's demand for foreign currency in the foreign exchange market to the right and cause the pound to depreciate.
D) shift the UK's demand for foreign currency in the foreign exchange market to the left and cause the pound to appreciate.

Question

Quizplus · Accepted Answer

Higher inflation in the UK compared to other countries makes UK goods more expensive relative to foreign goods, decreasing the competitiveness of UK exports and increasing the attractiveness of imports. This leads to an increased demand for foreign currency to purchase imports, shifting the demand for foreign currency to the right in the foreign exchange market, which typically results in the depreciation of the pound.

If the UK Experiences Inflation Rates Higher Than in Other