In a freely fluctuating exchange-rate system,if the inflation in Country A rises in relation to inflation in Country B,what will the currency in country A do in relation to the currency in country B?
A) It will strengthen.
B) It will weaken.
C) It will remain the same.
D) It will lead to deflation.

Question

Quizplus · Accepted Answer

When the inflation in Country A rises in relation to inflation in Country B, the currency in Country A will weaken in relation to the currency in Country B. This is because the increase in inflation in Country A will reduce the purchasing power of its currency, making its goods and services relatively more expensive compared to those in Country B. As a result, people will demand less of Country A's currency, causing its exchange rate to weaken relative to the currency in Country B.

In a Freely Fluctuating Exchange-Rate System,if the Inflation in Country