If inflation in Australia is higher than inflation in Japan, what will happen to the exchange rate between the Australian dollar and the Japanese yen in the long run, ceteris paribus?
A)The dollar will appreciate against the yen.
B)The dollar will depreciate against the yen.
C)The dollar's value relative to the yen will not change.
D)Both the dollar and the yen will appreciate.

Question

Quizplus · Accepted Answer

Higher inflation in Australia will lead to a decrease in the purchasing power of the Australian dollar. This will make Australian goods relatively more expensive compared to Japanese goods. As a result, demand for Australian goods will decrease, leading to a decrease in demand for the Australian dollar. This will result in a depreciation of the Australian dollar relative to the Japanese yen in the long run, ceteris paribus.

If Inflation in Australia Is Higher Than Inflation in Japan