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Explain whether you agree or disagree with each of the following statements.

a) A nation's currency will depreciate if its inflation rate is less than that of its trading partners.

b) A nation whose interest rate falls more rapidly than that of other nations can expect the exchange value of its currency to depreciate.

c) A nation that experiences higher growth rates in productivity than its trading partners can expect the exchange value of its currency to appreciate.

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This solution examines local currency.

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a) A nation's currency will depreciate if its inflation rate is less than that of its trading partners. AGREE.

There is something that is missing here. There is no mention of interest rates in the two countries, and therefore, the explanation here is based on the assumption that we are only looking at the transaction demand for the two currencies. If that is the case, then lower inflation rate in the home country will mean that, ceteris paribus, the demand for the local currency will fall relative to the demand for ...

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