Question

Consider the exchange rate between New Zealand Dollars and British Pounds. Assume British inflation rates rise while U.S. inflation rates remain constant. Then (1) The demand for New Zealand Dollars____, shifting the demand curve of New Zealand Dollars to the ______. (2) The supply for New Zealand Dollars _______, shifting the supply curve of New Zealand Dollars to the _______. (3) Consequently, the New Zealand Dollars ______ against British pounds

Answer 1

By using interest rate parity we know that higher inflation lower is the exchange rate.

The demand for New Zealand Dollars_Increase___, shifting the demand curve of New Zealand Dollars to the ____right__.
The supply for New Zealand Dollars __decreases_____, shifting the supply curve of New Zealand Dollars to the __left_____.
Consequently, the New Zealand Dollars __rises____ against British pounds

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