Shifts in supply and demand for foreign exchange result from changes in relative price levels.

Question

Quizplus · Accepted Answer

Changes in relative price levels, including inflation rates, affect the demand for and supply of foreign exchange. For example, an increase in a country's inflation rate would make its goods relatively more expensive than goods of other countries, reducing their demand and thus decreasing the demand for that country's currency. Similarly, an increase in the inflation rate would increase the supply of that country's currency as its residents try to sell their currency to purchase goods from other countries at lower prices.

Shifts in Supply and Demand for Foreign Exchange Result from Changes