Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).

Question

Quizplus · Accepted Answer

When the inflation rate is higher in New Zealand than the US, it means that prices of goods and services in New Zealand are increasing faster than in the US. This will lead to a decrease in demand for imports from New Zealand by US consumers, as they would find it relatively more expensive. On the other hand, New Zealand consumers will increase their imports from the US, as they would find it relatively cheaper. As a result, there will be a higher supply of NZ$ in the foreign exchange market, causing the NZ$ to depreciate (lose value).

Assume That the New Zealand Inflation Rate Is Higher Than