Question

Will currency appreciate or depreciate - lower expected inflation vs. foreign currency, current account surplus, lower expected GDP growth vs. foreign currency, lower ST interest rates vs. foreign

A) Appreciate
B) Depreciate
C) No Change
D) Undetermined

Answer 1

A currency is likely to appreciate with lower expected inflation and a current account surplus, but potentially depreciate with lower expected GDP growth and short-term interest rates. Considering all factors, the influence on currency value is undetermined.

Step-by-step explanation:

When considering whether a currency will appreciate or depreciate, various factors influence its value relative to foreign currencies. A currency is likely to appreciate if a country has lower expected inflation rates relative to another country, as lower inflation preserves the currency's purchasing power.

Additionally, a current account surplus indicates that a country is exporting more than it imports, which increases demand for its currency, causing it to appreciate. On the other hand, lower expected GDP growth can indicate weaker economic performance, potentially leading to depreciation. Lower short-term interest rates usually reduce the attractiveness of currency as they indicate lower returns on investments held in that currency.

Thus, this combination of factors provides a mixed outlook, with some pointing towards appreciation and others towards depreciation, causing the answer to be perceived as undetermined.