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Theories of currency value 1. If in the future, the money supply of the country, Ruralia,...

Theories of currency value

1. If in the future, the money supply of the country, Ruralia, is growing faster than Ruralia’s economy and the money supply of a neighboring country, Urbania, is growing at the same rate as the Urbanian economy, how are the relative values of the two country’s currencies expected to change? Which theory of currency value do you rely on to determine that expected change?

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Answer #1

if the money supply in ruralia is growing more than the growth of the economy then the country will face inflationary situation and as urbania is growing at the same rate as urbania's economy the currency value of that country will stay constant. the currency value of ruralia will decline as there will be a rise in inflation as compared to urbania.

the simple demand and supply theory of value of money is used to determine the expected change in value of currency. when supply of currency is more than output value of money will decline and vice versa.

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