In the quantity equation framework for understanding the determinants of long-run inflation,a depreciation of the exchange rate ________ velocity,putting ________ pressure on inflation.

Question

Quizplus · Accepted Answer

In the quantity equation framework (MV = PY), a depreciation of the exchange rate typically leads to an increase in the price level (P), as imported goods become more expensive. This does not directly affect the velocity of money (V), which is more about how often money circulates in the economy. However, the increase in the price level puts upward pressure on inflation, as goods and services in the economy become more expensive.

In the Quantity Equation Framework for Understanding the Determinants of Long-Run