Answered: What happens over time to the…

What happens over time to the currencies of countries with higherinflation rates than that of the United States? To those with lowerinflation rates?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter4: Exchange Rate Determination

Section: Chapter Questions

Problem 2IEE

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Question

What happens over time to the currencies of countries with higher
inflation rates than that of the United States? To those with lower
inflation rates?

Expert Solution

Step 1

Currency exchange rate is the rate at which the currency of one country is traded for another country’s currency. Currency exchange rate of a country vis a vis another country is affected by various factors- a country’s inflation rate, interest rates, balance of payments, its foreign currency reserves, its political and economic stability. But mostly importantly, a country’s currency value is determined by its utility (i.e) its ability to purchase goods. If the inflation increases, its currency value decreases and vice versa.

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