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Homework answers / question archive / The inflation rate is forecast to be 2
The inflation rate is forecast to be 2.5% in Australia and 4.5% in the U.S. The current spot rate AUD/USD is 1.2771. Ceteris paribus, the supply of foreign exchange to shift and the demand for foreign exchange to shift hence, the exchange rate will Orightward; leftward; rise O leftward; rightward; fall Orightward; leftward; fall leftward, rightward, rise
Rightward; Leftward; Fall
Since the inflation rate is US is higher, the supply of the foreign exchange would be higher, hence a rightward shift. Since the Australia inflation is lesser, the foreign exchange demand would be lower, hence a leftward shift in demand of USD. Also, this would result in a fall in exchange rate ie. Australian dollar would be relatively more precious.
