APFIVE Inflation and Currency Exchange Rates
If a country’s inflation rate is consistently higher than its trading partners, what is the most likely effect on its currency in a floating exchange rate system?
A
Its currency value will remain stable due to purchasing power parity
B
Its currency will depreciate relative to trading partners’ currencies
C
Its currency will appreciate due to higher nominal interest rates
D
Its currency will appreciate due to increased export competitiveness
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