Assume that in a free country,people in the country can choose to hold assets in any currency.As the domestic inflation rise,the opportunity cost of holding the domestic currency _________ and people will switch to hold assets in _________ currency.
A) increases; foreign
B) increases; domestic
C) decreases; foreign
D) decreases; domestic

Question

Quizplus · Accepted Answer

When domestic inflation rises, the purchasing power of the domestic currency decreases, resulting in a higher opportunity cost for holding it. Therefore, people will switch to holding assets in foreign currency, which is expected to have a lower inflation rate and a relatively stable purchasing power. This will increase the demand for foreign currency and decrease the demand for domestic currency, leading to a depreciation of the domestic currency exchange rate.

Assume That in a Free Country,people in the Country Can