Tutorial 8

Q 5 ) How does the relatively high inflation rate add to the problems to a strong
currency.
The high inflation rates means the real value of the currency has appreciated
even more than its nominal value, making country products even less cost-
competitive with Asian imports.
We can assumption that higher inflation rates will lead to an appreciation in the
currency. The fundamental assumption driving this is that if inflation rates are
higher, they will attract more foreign capital, increasing demand for the local
currency, and thereby driving up its value. Backing up this idea is a second
factor, that if inflation rates are higher domestic consumption falls, reducing the
demand for imports at a given exchange rate, which reduces the supply of
currency, increasing its value.