The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-If prices rise within a country, then, other things equal, the value of a unit of domestic currency will:
A)rise in both the domestic and the foreign exchange markets.
B)fall in both the domestic and the foreign exchange markets.
C)rise in the domestic market and fall in the foreign exchange market.
D)fall in the domestic market and rise in the foreign exchange market.
E)fluctuate unpredictably in both domestic and foreign exchange markets.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-If prices rise within a country, then, other things equal, the value of a unit of domestic currency will:
A)rise in both the domestic and the foreign exchange markets. 
B)fall in both the domestic and the foreign exchange markets. 
C)rise in the domestic market and fall in the foreign exchange market. 
D)fall in the domestic market and rise in the foreign exchange market. 
E)fluctuate unpredictably in both domestic and foreign exchange markets.

Quizplus · Accepted Answer

When prices rise within a country (inflation), the purchasing power of the domestic currency falls domestically because more currency is needed to buy the same goods. In the foreign exchange market, the currency also depreciates because it can buy fewer foreign goods for the same amount, making it less valuable compared to other currencies.

The Figure Given Below Depicts the Foreign Exchange Market for British