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How do high inflation rates affect the exchange rate of a country in the short and the long run?

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Solution Summary

Inflation rates and exchange rates are examined in this post.

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In short run, increase in inflation would mean that the cost of domestic goods would increase, as domestic raw material is dearer, however the cost of imports will remain same. So the imports will increase and exports will decline. This will result higher demand for foreign currency and lower supply of foreign currency. Hence the cost of foreign currency in comparison of domestic currency will increase. So exchange rates will rise. Inflation rates and exchange rates: The relationship between inflation rate and exchange rate is governed by the ...

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