Me14
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#1
Report Thread starter 7 years ago
#1
Hey,

Can someone help me with how an increase in a country's exchange rate will reduce its inflation?

I know that it will mean cheaper imports and thus lowers cost push inflation but is there any more analysis of this?

I don't fully understand the relationship between exchange rates and inflation :-/


would appreciate any help!
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samboJ
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#2
Report 7 years ago
#2
Increase in exchange rate -> increased purchasing power of currency / exports appear more expensive -> able to import more for same cost / volume of exports sold decreases -> worsened current account leads to worsened balance of payments / net exports -> AD falls as (X-M) is a component of AD(=C+I+G+{X-M}) -> insert AD falls diagram -> fall in general price level (assuming all else stays the same - ceteris paribus) -> fall in inflation / maybe deflation depending on current position (current UK inflation is 1.6% - lower than wage + bonuses increase for first time in over 3 years) (8 EU nations and Sweden currently experiencing mild deflation).
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Me14
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#3
Report Thread starter 7 years ago
#3
(Original post by samboJ)
Increase in exchange rate -> increased purchasing power of currency / exports appear more expensive -> able to import more for same cost / volume of exports sold decreases -> worsened current account leads to worsened balance of payments / net exports -> AD falls as (X-M) is a component of AD(=C+I+G+{X-M}) -> insert AD falls diagram -> fall in general price level (assuming all else stays the same - ceteris paribus) -> fall in inflation / maybe deflation depending on current position (current UK inflation is 1.6% - lower than wage + bonuses increase for first time in over 3 years) (8 EU nations and Sweden currently experiencing mild deflation).

Thank you so much!!
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