Question

Graham has moved abroad to pursue his career after college. Unfortunately, the country where he is now living is experiencing a period of very high inflation. Graham can expect the currency of his newly adopted country to?

1) decrease in value due to a decrease in demand as potential investors are no longer interested in investing in an inflationary economy.
2) increase in value due to a domestic increase in demand for more and more currency.
3) increase in value due to an increase in supply as investors who hold the country's currency rush to sell the currency as inflation fears grow.
4) either increase or decrease in value, depending on whether or not increased domestic demand is offset by decreased foreign demand.

Answer 1

Graham can expect the currency in his new country to decrease in value due to high inflation, which reduces demand for the currency and increases its supply on the market.

Step-by-step explanation:

Graham is living in a country experiencing very high inflation, which generally leads to a depreciation of the country's currency.

When inflation rates are high, a currency's buying power decreases, and international investors tend to become less eager to hold onto it. Expected depreciation in a currency encourages people to divest themselves of it, simultaneously increasing the supply of the currency and decreasing its demand.

Hence, Graham can expect the currency of his newly adopted country to decrease in value due to a decrease in demand as potential investors become hesitant about investing in an inflationary economy, while those holding the currency may try to sell.

When a country experiences high inflation, its currency tends to decrease in value. This is because the buying power of the currency decreases, making international investors less interested in holding it.

As a result, there is a decrease in demand for the currency and an increase in its supply. Both movements in demand and supply cause the currency to depreciate.