Question

exchange rate and purchasing power quick check
if the inflation rate in new zealand were to rise relative to the inflation rate in russia, which of the following correctly explains what would happen to the exchange rate for the new zealand dollar in terms of russian rubles? (1 point)

the rubles-per-dollar exchange rate would fall since the inflation increases the supply of dollars and decreases the demand for dollars.

the rubles-per-dollar exchange rate would rise since the inflation rate increases the supply of dollars and decreases the demand for dollars.

the rubles-per-dollar exchange rate would fall since the inflation decreases the supply of dollars and increases the demand for dollars.

the rubles-per-dollar exchange rate would rise since the inflation decreases the supply of dollars and increases the demand for dollars.

Explanation:

When New Zealand's inflation rate rises relative to Russia's, New Zealand goods become relatively more expensive. This reduces the demand for New Zealand dollars (as foreigners buy fewer New Zealand goods) and increases the supply of New Zealand dollars (as New Zealanders buy more foreign, cheaper goods). In the foreign exchange market, an increase in supply and a decrease in demand for a currency (New Zealand dollar here) leads to a depreciation of that currency. So the rubles - per - dollar exchange rate (how many rubles you get for a dollar) falls.

Answer:

A. The rubles - per - dollar exchange rate would fall since the inflation increases the supply of dollars and decreases the demand for dollars.