If the inflation rate in New Zealand were to rise relative to the inflation rate in Russia, which of the following correctly explains what would happen to the exchange rate for the New Zealand dollar in terms of Russian rubles?(1 point)

Question

Responses

The rubles-per-dollar exchange rate would fall since the inflation decreases the supply of dollars and increases the demand for dollars.
The rubles-per-dollar exchange rate would fall since the inflation decreases the supply of dollars and increases the demand for dollars.

The rubles-per-dollar exchange rate would fall since the inflation increases the supply of dollars and decreases the demand for dollars.
The rubles-per-dollar exchange rate would fall since the inflation increases the supply of dollars and decreases the demand for dollars.

The rubles-per-dollar exchange rate would rise since the inflation decreases the supply of dollars and increases the demand for dollars.
The rubles-per-dollar exchange rate would rise since the inflation decreases the supply of dollars and increases the demand for dollars.

The rubles-per-dollar exchange rate would rise since the inflation rate increases the supply of dollars and decreases the demand for dollars.

Answer 1

When the inflation rate in New Zealand rises relative to that in Russia, the purchasing power of the New Zealand dollar decreases compared to the ruble. This means that products in New Zealand are becoming more expensive relative to those in Russia.

As a result, investors and consumers may demand fewer New Zealand dollars because the higher inflation means that the returns on investments denominated in New Zealand dollars would be less attractive. Therefore, the demand for New Zealand dollars decreases while the supply may potentially increase, leading to a depreciation of the New Zealand dollar in terms of Russian rubles.

Based on this reasoning, the correct statement is:

The rubles-per-dollar exchange rate would fall since the inflation increases the supply of dollars and decreases the demand for dollars.