Question

Which of the following best explains why higher inflation will cause the Australian dollar to depreciate relative to the New Zealand dollar?

Answer 1

Inflation rates can impact exchange rate markets. Countries experiencing higher inflation tend to have decreased demand for their currency, resulting in currency depreciation.

Step-by-step explanation:

Inflation rates can impact exchange rate markets. Countries experiencing higher inflation tend to have decreased demand for their currency compared to countries with lower inflation, resulting in currency depreciation. This can be explained by the decrease in buying power of the currency and the reduced eagerness of international investors to hold it. When a currency depreciates, it means it has become less valuable relative to another currency.