If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar.
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

If inflation increases in Australia, it is expected that the prices of goods and services in Australia will rise relative to the prices of goods and services in the U.S. This means that the demand for Australian dollars may decrease as foreign investors seek higher returns elsewhere. As a result, the value of the Australian dollar is expected to decrease with respect to the U.S. dollar, placing downward pressure on it.

If Inflation Increases Substantially in Australia While U