If the rate of inflation in Australia exceeds the rate of inflation in Great Britain, we would expect the Australian dollar to depreciate in value against the British pound.

Question

Quizplus · Accepted Answer

When the rate of inflation in one country exceeds that of another country, the purchasing power of the currency of the higher inflation country tends to diminish in relation to the currency of the lower inflation country. This leads to a decrease in demand for the higher inflation currency, causing its value to depreciate against the lower inflation currency. Therefore, if the rate of inflation in Australia exceeds that of Great Britain, we would expect the Australian dollar to depreciate in value against the British pound.

If the Rate of Inflation in Australia Exceeds the Rate