New Enroll in RBI Grade B New Batch - Starts on May 21

    Question

    How does inflation in a country affect its currency's

    exchange rate?
    A High inflation has no impact on the exchange rate. Correct Answer Incorrect Answer
    B High inflation makes the currency appreciate Correct Answer Incorrect Answer
    C High inflation makes the currency depreciate Correct Answer Incorrect Answer
    D High inflation only affects fixed exchange rates Correct Answer Incorrect Answer
    E High inflation strengthens the currency's position in the global market. Correct Answer Incorrect Answer

    Solution

    High inflation in a country tends to depreciate its currency because it decreases the purchasing power relative to other currencies. This leads to less demand for the domestic currency and more demand for foreign goods, putting downward pressure on the currency.

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