What is the most likely effect on a country’s currency, given a decrease in the country’s inflation rate? Why?
An appreciation of its currency, because its real rate of interest has increased.
Lola, The currency of a country with high inflation tends to depreciate, while the currency of a country with low inflation tends to appreciate. In theory, the mvt in the exchange rate between two currencies should exactly offset the difference in inflation rate between two countries - Purchasing Power Parity. I hope this helps.
that’s what I thought, but I was looking at the wrong answer. Thanks, guys.