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More generally, if the U.S. has a higher inflation rate than some other country, what should...

More generally, if the U.S. has a higher inflation rate than some other country, what should happen to the value of the dollar relative to that nation’s currency? What should happen to the value of the dollar relative to that nation’s currency if the U.S. inflation rate is lower than that in the other country?

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Answer #1

If the inflation is lower in the US relative to the other nation, the good will be cheaper in the US that will increase the US exports and that will depreciate the other currency and appreciate the US currency.

if the US has a higher inflation then the US will start importing and that will lead to a depreciation in the US dollar. it will appreciate the foreign currency relative to the US dollar.

conclusion: the nation which has a higher inflation experience a depreciation in its currency relative to the nation where the inflation is lower.

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