if there is increase in a country’s inflation rate, then local goods expensive, so import increase, which means more money spend oversea, so the demand for domenstic currency decrease, docmenstic currency depreciate? is this analysis correct, why I feel something wrong here while the conclusion is correct? Thanks.
Inflation has a depreciating influence on a currency. One way to think about it is simply to realize that real interest rates are lower with higher inflation. Low real interest rates depress the value of a currency.
agree with chebychev No point in beating around the bush with imports and demand Inflation Increase -> Price domestic mkt (Pd) increase and Price in foreign mkt (Pf) remain same. Pd/Pf = exchange rate. As Pd increase, the exchange rate increases hence Domestic currency Depreciates