If inflation increases substantially in Australia while euro area inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the euro.
A) upward
B) downward
C) either upward or downward (depending on the degree of the increase in Australian inflation)
D) none of the above; there will be no impact

Question

Quizplus · Accepted Answer

Higher inflation in Australia compared to the euro area would likely lead to a depreciation of the Australian dollar relative to the euro, as higher inflation typically reduces a currency's purchasing power and can lead to expectations of lower interest rates or economic instability.

If Inflation Increases Substantially in Australia While Euro Area Inflation