Economics Inflation Questions
The impact of inflation on exchange rates is that it generally leads to a depreciation of the domestic currency. When a country experiences higher inflation rates compared to its trading partners, the purchasing power of its currency decreases. This makes goods and services in that country relatively more expensive compared to other countries, leading to a decrease in demand for its currency. As a result, the exchange rate of the domestic currency tends to depreciate, making imports more expensive and exports more competitive.